Relaxing of foreign investment rules set to shake up India’s e-commerce market

India’s e-commerce space might be about to get a shake-up after the government appeared to open the door to overseas entities owning majority stakes in domestic internet commerce firms.

An announcement from India’s Department of Industrial Policy and Promotion (DIPP) yesterday updated the country’s foreign direct investment (FDI) regulations to allow 100 percent FDI in B2C e-commerce. That potentially opens the floodgates for global retail players like Walmart, eBay and Alibaba to buy up e-commerce players in India and stake their claim to the country’s $10 billion market, which is forecast to grow ten-fold to $100 billion by 2020.

For context, India has strict rules around foreign involvement in retail. 100 percent FDI is banned for physical consumer stores — that’s one reason why Apple, for one, has no independent retail footprint in the country — but it is allowed for B2B. 100 percent FDI had been outlawed for online commerce too, but yesterday’s note looks to have lifted that barrier. (Small caveat: the rule is lifted for marketplace e-commerce only, but that covers India’s biggest firms.)

The change — which, like all government notices, could be subject to interpretation — could foresee a wave of future investments and acquisitions as overseas firms finally have the ok to invest heavily and build out their own footprint in India. Many have already picked up stakes in India’s top e-commerce firms — Walmart has long been keen on India, eBay was an early Snapdeal investor, Alibaba has stakes in Snapdeal and Paytm, while Amazon has its own India-based entity — but now they can take majority holdings.

The timing is notable too, since we’re in something of a tough period for India’s top e-commerce firms, which are struggling to hold their valuations and attract new investor cash as they bid to compete with Amazon and each other with deep discounts and (apparently) escalating burn rates. A fresh influx of capital could be much welcomed, and it may not be limited to the top players, too. Niche and vertical online retailers, such as e-grocers BigBasket (which just raised $150 million), Grofers and PepperTap, baby product specialist Hopscotch, and others like IPO-bound Shopclues, could be desirable for those looking in to India.

There are some conditions to the new rules, though. For one thing, no single vendor on an e-commerce marketplace is allowed to account for more than 25 percent of sales. That could be problematic for Amazon, since its joint-venture Cloudtail is estimated to account for at least 40 percent of Amazon India’s total sales, while Flipkart’s largest retailer, WS Retail, is thought to bring in upwards of one-quarter of its business.

Also in the interest of competition and fair play, the government looks to be curbing the aforementioned culture of deep discounting products, according to one clause in its announcement:

E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field.

This appears easier said than done — how is it enforced, for example? — but it could potentially be transformational, since Flipkart, Snapdeal and Amazon offer lucrative promotions to lure both sellers and end consumers to their websites in the hope that, once a customer, they will return for repeat purchases. That could potentially serious level the playing field and reorder the status quo — at the minimum it will place new significance on the customer experience when there’s no discount on offer to make the pain of a bad experience bearable.

The new regulations are effective immediately, and it will be very interesting to see how long it takes before we see a tangible impact. So far, Snapdeal CEO Kunal Bahl is the sole e-commerce exec to come out in support of the news, but we’ll keep our eyes peeled for further reactions.

Hat tip Pankaj Mishra