Foreign investments & e-commerce activities
Recently pink papers covered a story stating Flipkart‘s ambitions to raise USD 100 million. (around Rs. 555 Crore.) However, there has been a great deal of debate surrounding online shopping sites in India who have become a medium for sourcing foreign investments in the country.
September 10, 2012 / 18:48 IST
Rushab Dhandokia, 3rd Year Student, Institute of Law, Nirma University
Recently pink papers covered a story stating Flipkart’s ambitions to raise USD 100 million. (around Rs. 555 Crore). [1] However, there has been a great deal of debate surrounding online shopping sites in India who have become a medium for sourcing foreign investments in the country. There exists a big deal mystery surrounding the nature of such transactions undertaken, because of the ambiguity that whether such transactions were executed keeping in mind the procedure established by law.This piece of writing, aims at-a) Codifying the relevant laws that govern e-commerce businesses.
b) Concluding whether there has been violation of any law, if yes what consequence would follow. Before we start let us first understand few basics:-1) It is important to mark a difference between Single Brand Retail and Multi Brand retail.Single Brand Retail: Illustratively, when Addidas Company open its stores in Ahmedabad, Delhi, Mumbai etc. selling Addidas shoes, Addidas T-shirt, Addidas Sunglasses only, this Is Single Brand Retail.Multi Brand Retail: When Reliance opens malls and sells shoes, T-shirts, Sunglasses etc. of numerous brands under one roof is called multi Brand retailing.2) The government body that governs and regulates this sector is Department of Industrial Policy and promotion (DIPP) which function under the Commerce Ministry.With this background, we now deal with its 1st issue-a) Codifying the relevant laws that govern e-commerce businesses.It was on 10th January 2012, vide its Press Note No.1 (2012 Series), DIPP took initiative to clarify the cloud surrounding foreign investments in retail sector. Through this press note it opened the gates for 100% foreign investments in Single Brand retail and for multi brand retail the same has been put on hold due to intense criticism from the opposition and the Kirana shop owners.Per sean interesting press note, but it laid no rules for investments in e-commerce ventures operating in India. The question remains- would these ventures fall within the bracket of Single Brand Retail or Multi Brand Retail?In order to clarify this important doubt DIPP on 1st April 2012, issued the “Consolidated Foreign Direct Investment Policy” for 2012.The circular defines e-commerce activities as-E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.This means FDI upto 100% through automatic route in e-commerce ventures is legal, provided that the venture is a B2B and not a Business to Consumer (B2C) one.Further, the circular in para 6.2.16.1.1 states- Wholesale trading would include resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales and B2B e-Commerce.This means B2B e-commerce activities fall under the purview of Wholesale Trading.And wholesale trading has been defined as-sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption. The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales.Hence, since B2B e-commerce activities fall under the purview of Wholesale Trading, rules applicable to wholesale trading would be equally applicable to B2B ecommerce activities.In para6.2.16.1.2, titled- Guidelines for Cash & Carry Wholesale Trading/Wholesale Trading (WT) which provide further guidelines for WT. The Author seeks to draw attention to the last guideline i.e. guideline (f) which reads as- A Wholesale/Cash & carry trader cannot open retail shops to sell to the consumer directly. Would these e-commerce websites fall within the brackets of “retail shops”? i.e. are e-commerce websites a form/kind/type of retail shops?This is one point where clarifications are required.Having dealt with the governing laws we’d now deal with the 2nd issue, being- Understanding whether there has been violation of any law, if yes what consequence would follow.For our purpose we can classify e-commerce activities as either B2B companies or B2C operating as a) Single Brand stores b) Multi Brand Stores.If they are into B2B trading activities they are safe and qualify for 100% automatic FDI route, but the fact is that in India, the bulk of the e-tailing business is centered around selling to the consumer, and not B2B.What has been reported in the press is that there are at least 220 such businesses, of which 50% have received foreign funding from an angel or first round of VC investments. For example, Flipkart, which does multi-brand retailing of everything from books to mobiles, has raised more than USD 80 million in four fund raising rounds till date. Its existing investors include Accel Partners and Tiger Global Management LLC. Companies such as Snapdeal and Myntra have also received foreign investment.So how did India’s e-tailing companies manage to flout these norms? Since the nature of the back-end was not clearly defined, many of these companies attracted funding by creating a wholesale logistics or warehousing arm where 100% FDI could be used. (Logistic is required for an e-tailing company for delivering their goods and warehousing for storing goods.)These logistics / warehousing companies would not have a website and they technically became the sourcing arm for the e-commerce business. But that too is a violation of the law because the e-commerce business is sourcing 100% of the products from its trading arm, where only 25% sourcing is allowed.ConclusionWell, this shows clear violation of the FDI norms. And the worst that can be expected is close down of these ventures, provided that they change their business activities from B2C to B2B, which possibly is a tough task.DisclaimerThe views expressed here are those of the author and do not represent the views of The Firm, its host channel CNBC TV18, the owner Network 18 or this website and/or any related parties. The student has vouched for his/her identity and the authenticity of the article. We have not conducted independent verification of the same. This website is not responsible for misrepresentations. In case of any anomalies/errors/complaints you can write to us at thefirm@in.com_______________________________________________________[1]
http://www.livemint.com/2012/08/13235109/Flipkart-to-raise-100-mn-by-y.htmlhttp://dipp.nic.in/English/acts_rules/Press_Notes/pn1_2012.pdfhttp://dipp.nic.in/English/Policies/FDI_Circular_01_2012.pdfhttp://www.livemint.com/2012/08/13235109/Flipkart-to-raise-100-mn-by-y.html Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
