Wary of turning away foreign investors, the government could remove or substantially water down a controversial recommendation of an e-commerce task force that sought to empower domestic founders of such companies to retain control even if they hold only a tiny stake.
A senior government official told FE that while a final decision will be made public when the policy is finalised, initial discussions suggest there is considerable unease about this recommendation.
“First, any such policy will make it harder for domestic e-commerce companies to raise funds from foreign investors. Second, it may spur demand for similar privileges for founders of companies cutting across sectors, leading to uncertainties about brownfield foreign direct investments (FDI) and unnecessary legal tussles. Third, it will give the impression that the government intends to discriminate against foreign investors at a time when they are being wooed under ‘Make in India’ and other programmes,” said the official.
Analysts have termed the recommendation as “going back in time”, ironically when many Indian start-ups are starved of capital and hungry for foreign funds. This could also threaten inflows of FDI in trading (including via e-commerce), which jumped an annual 86% to $4.35 billion in FY18.
In the context of allowing FDI in inventory model, an e-commerce firm in India is defined by the task force as one where foreign investment doesn’t cross 49%, the founder/promoter is a resident Indian and the platform company is controlled by the Indian management. The task force’s proposals, if implemented, have the potential to deny majority stake and/or control for foreign investors in Indian e-tailers holding inventories.
While Walmart has concluded its $16-billion acquisition of 77% stake in Flipkart, all established Indian start-ups — from Paytm Mall to Ola — have received sizable chunks in foreign funding. Some of the fund-raising by domestic start-ups was possible as foreign investors were hopeful of gaining control in these ventures at some point in the future by raising their stakes, according to analysts.
Foreign players are rapidly investing in the domestic e-commerce market, which, Morgan Stanley estimates, may be worth $200 billion in 10 years.
While the task force was headed by then commerce secretary Rita Teaotia, the department of industrial policy and promotion (DIPP) is now going to assume greater role in shaping the policy, said another source.
Last month, a panel of senior bureaucrats, headed by department of industrial policy and promotion (DIPP) secretary Ramesh Abhishek, reviewed recommendations of the task force and decided to meet again in around a month.
The meeting was part of the government’s efforts to hammer out consensus on the e-commerce policy, after departments, including DIPP and the ministry of electronics and information technology (MEitY), expressed their reservations on certain suggestions of the task force.
The task force had earlier suggested “the need to amend the relevant provisions in the Companies Act so as to facilitate founders to have control over their e-commerce companies, despite having small shareholding, would be examined in the light of the experience of their utilisation by e-commerce companies.”
If the suggestion on allowing founders to retain control with a small stake is finally scrapped, it will mark the elimination of two of the key but controversial recommendations of the task-force. Already, Abhishek has made it clear the government isn’t planning to ease rules to allow FDI in B2C e-tailers holding inventory of various goods, even if such products are locally made (only in food retail is 100% FDI allowed). The task force had suggested conditional approval to FDI in e-commerce marketplaces that hold inventory of locally-produced items.
Amarjeet Singh, partner (tax, regulatory and internet business) at KPMG India, has said: “If such a policy is enforced, any discussion between promoters of Indian start-ups and foreign investors is going to be difficult and their ability to raise funds will be a bit less effective.”
Some analysts have also said that the central bank, in any case, has valuation norms to ensure the stake of Indian promoters is not unfairly diluted and performing Indian companies are permitted to freely raise capital. So the need for extra protection to founders isn’t warranted.
Source: Financial Express