E-Commerce Sector Lobbies For FDI : Since the government specified last year that it won’t allow Foreign Direct Investment (FDI) in online retail and would also not allow Private Equity or Venture Capital funds to directly invest in e-commerce companies, the sector has been facing a crash crunch. While on the one hand, sites are gaining customers as people become more comfortable with buying things online, on the other , many businesses may not be able to sustain unless they are able to get second and third rounds of funding. A report in Mint quotes a May report by investment bank Allegro Capital Advisors that states that out of the 53 e-commerce companies that got $853 million in venture capital over the past three years, only 11 have managed to raise further rounds of funding. So even as e-retailers are lobbying in order to try and persuade the government to ease the rules some sites have found a way around the rules by splitting the back, or wholesale, end of the business from the front, or customer-facing, end, which takes orders from shoppers. The orders are fulfilled by the wholesale entity. However, investors worry about returns and the future when a company may want to list given the complicated structure. In the meantime the lobbying effort is set to intensify over the next few weeks when Nasscom, the industry association representing the information technology sector, is expected to announce its newly created Internet Council, which will take up issues related to the e-commerce industry. E-commerce firms that are choosing to operate as “marketplaces” have been able to circumvent the FDI related regulations. In a “marketplace” independent merchants sell products directly to shoppers, the model that eBay and Amazon.in use in India. A marketplace is seen as a platform or meeting point for buyers and sellers and therefore a service - so FDI regulations for retail don’t apply. Some online retailers, including Flipkart, converted themselves to such a structure after the rules were announced. The Indian government is still working on clarifying FDI rules on brick and mortar retail and insurance. The government’s focus on building greenfield infrastructure has been evident in the retail FDI strategy. E-commerce isn’t a critical part of this scheme. From a government perspective, it’s not a priority sector at all. It’s too small and it neither creates much infrastructure or backend set-up.
Posted on: Sun, 11 Aug 2013 19:11:51 +0000
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