Govt FDI ban has no effect on B2C e-comm biz: BMR

Below is an edited transcript of the analysis on CNBC-TV18.

Q: Is the problem similar to the one prevalent in physical multi-brand retail?

A: The first fundamental aspect to note is that there has been no change in government policy in terms of foreign direct investment into e-commerce companies. Whatever was the policy that existed prior to the government notification exists today. The government has merely reiterated its stand.

Also Read: No FDI for e-commerce in retail: DIPP

There are a number of different models used to structure the foreign capital that has come into e-commerce companies. One commonly-used model is the Market-Place model where an e-commerce company merely provides the platform which gets consumers and ordinary retailers onboard.

This is a model that is followed by ebay and Amazon in India. This model poses no problems regarding the flow of foreign investment.

Another model involves the setting up of distinct B2B and B2C operations by e-commerce companies. It is in the B2B model where foreign investment actually comes in. The B2B operation owns the platform that interacts with the consumer, whereas in the B2B retail model foreign investment flows in through India-owned local franchises. So, nothing has really changed.

Q: So, Amazon can continue to operate in India without a problem?

A: Amazon the way it operates today through  junglee.com can continue to operate because that is a pure online market place. There is no actual act of physical retail that Amazon is doing in India.

Q: What does this actually mean for future funding? Why would foreign investors continue to pump money into these e-commerce ventures?

A: I don't think foreign capital was really coming in with the absolute and definite hope that the front-end will be opened up. I think significant value is already being created in the B2B structures that have been set up. This includes significant value in the form of customer acquisition and the platform owned by the B2B company. So, I think foreign capital should continue to flow in.

The other important aspect is that within the same set of guidelines a decent amount of foreign capital has already come in into the e-commerce sector. E-commerce has really been fueled by private equity investments, a majority of which is foreign capital.

The government has had an opportunity to look at all these structures. I think the understanding is or the hope is that this structure passes muster with the government and therefore that foreign capital should continue to flow in into the value-accretive B2B space.

If at a later point in time as a part of the reform movement that the government is considering, the government believes that the B2C e-commerce retail does not interfere with the local traders and may want to bring it in with some safeguards by issuing an enabling provision in at a later point in time.

But by merely bringing in that provision, does not catalyse the amount of foreign capital coming in because I think already a fair amount of foreign capital has come in and adequate legal structures have been created which the government is fully aware of. So, I don’t see any form of clampdown happening.

Q: The DIPP feigns ignorance and says it has no idea about any sort of FDI having come into this sector at all?

A: I don't think the DIPP is probably aware of any foreign capital flowing in into the B2C companies while it may be aware of foreign capital that has flown into B2B companies.

Given the amount of capital that has flown in and the attention that this sector has attracted over the last couple of years, I do find it hard to believe that the DIPP would not know of the foreign capital that has come into the B2B segment.

Q: How do you deliver if a state is not onboard with the multi-brand policy?

A: The core point is that the actual act of retailing is not happening through the B2B e-commerce platform. The core act of retailing happens through local franchisees or Indian-owned retailers. Whether someone is ordering goods from Kolkata or Delhi, the actual fulfillment occurs through a local retailer or locally-owned retailer.