Opinion | FDI in ecommerce: Get in line with the spirit and not just the letter of the law

Moneycontrol Contributor

For almost 20 years now the law of the land on Foreign Direct Investment (FDI) in ecommerce has been simple, short and unchanged. It simply reads as “[FDI in] Multi-brand B2C eCommerce is not allowed.”

The lawmakers were clear about its intent and its desired outcome. The intent was to attract foreign Investment into the country to build, or otherwise strengthen, the digital infrastructure of the country. The desired outcome was to start a process of nation building via economic and financial inclusion of its masses at a scale, the likes of which has never been seen before. Initiatives like Digital India, Startup-India, Standup India, Make in India, UPI, JAN DHAN, Aadhaar, eGovernance and many more had this common underlying theme of enabling and leveraging our largest asset that is our 1.3 billion population.

For more than a decade, this law was not only well understood but was (generally) obeyed by everyone, till that is to say, it wasn’t. Either greed or contempt of law or ignorance or some combination of all the above gave way to a wave of new-age ecommerce companies that through innovative corporate restructuring started circumventing the law. The violations were blatant and obvious, and were called out on several occasions. The policy makers and the policy enforcers and industry ignored it, till they couldn’t.

The government through its Press Note 3 (2016) made a feeble attempt to guide the violators in the right direction. But the violations continued unimpeded, though some minor cosmetic tweaks to satisfy the letter of the law were made. Two years later via Press Note 2 (2018) the government came up with a much more detailed “clarification” that not only put an end to these shenanigans but also established a deadline for compliance. The deadline was not extended despite massive lobbying by interest groups.

So, what does all this mean for the ecommerce industry in general, and the consumer, small and medium enterprises (SME) and domestic players in particular?

First, let’s respond to the nay-sayer’s main objection “… but the consumer will suffer”. Yes, in the short-term there will be withdrawal pains as the “cocaine of discounts” is withheld from the consumer. But it will prevent any further damage to the SME ecosystem in the country and allow the process of long-term sustainable healthy and competitive retail environment to thrive in the country. If anyone should recognize this dangerous cycle of oligopoly, it should be us Indians. For almost 200 years, the East India company unleashed an exploitation which has been unparalleled in the history of the world. The argument of “…but it gave us railways”, “… but it gave us English education system” have long been busted by the outcome. The only thing railways and other so called “benefits” fast tracked was the decline into poverty and subjugation of millions of unsuspecting Indians.

In a similar vein, capital dumping to the tune of lakhs of crores into the retail segment, circumventing the spirit in which these investments were to be made via clever corporate structuring, giving unsustainable discounts that led to immense damage to the retail fabric of the country and cleared out competition, made small Indian businesses unviable. It left control in the hands of a few groups and their preferred partners and started a dangerous march to yet another era of oligopoly. Ironically, the people who were supposed to be the beneficiary of these FDI restrictions became the hapless victims of it.

This leaves us with the impact on the future of ecommerce biggies, especially the ones who have built very large and very lucrative businesses by circumventing the law of the land. In the short term, as we are already witnessing, they will be forced to rejig their businesses to be compliant with the letter of the law. We will hear things like “reduction of stakes” from their group companies, emergence of “alpha-beta-tango chain of companies” to create a supply chain that allows them to keep their existing businesses compliant and going.

But the biggest impact will come in a completely different form. The fact that the Department for Promotion of Industry and Internal Trade(DPIIT) issued its Press Note 2 as a “clarification” and not “new regulations” has made it abundantly clear that it wants the spirit of the law to be followed as much as the letter. It wants an ecosystem where investments are channeled to develop the SME ecosystem and drive an economic inclusion agenda.

This means that the future FDI from new players or incumbents will happen only when they are fully aligned with not just the letter but also the spirit of the law. Corporate restructuring and other mechanisms that served them well till date will be a very risky bet to take. The good news is that there is no dearth of capital which will love to come to the country to develop its infrastructure and its native ecosystem.