Retail

Regulation must remain mindful of capital needs


By Utkarsh Sinha

The ED’s decision to probe Amazon and Flipkart for FDI violations in response to a PIL has been long speculated by industry watchers. While the merit of FDI caps on retailers and marketplaces is open to discussion, it does appear that the spirit of the law was violated, while ensuring strict compliance with its letter.

There are three key categories of operators who are in this space: multi-brand marketplaces (MBMP), multi-brand retailers (MBR) and multi-brand wholesalers (MBW). As the ‘foods’ category permits 100% FDI (automatic route), the non-food categories is explored here.

For MBMPs, 100% FDI is permitted (automatic route), provided the marketplace has no more than 25% exposure to a single vendor or its group companies. Since multi-brand retailers are denied FDI, this is the preferred model (both Amazon and Flipkart are marketplaces). By treating subsidiaries not as retailers (that sell directly to consumers), but as vendors utilising an online marketplace platform, the operators can effectively bypass the stringent 0% FDI norms for online retailers.

Using this model, Amazon runs Cloud-Tail and Appario Retail, both among the largest vendors on its platform. Cloud-Tail is owned 100% by Prione Business Services, which is a 49-51 JV between Amazon and Catamaran India. Appario Retail was established with a similar JV structure. Amazon also structured its acquisition of More similarly: More is now owned 49% by Amazon (foreign), with a 51% stake held by Indian AIF Samar Capital.

Flipkart is no stranger to these acrobatics. Until August, it had WS Retail Services as its main retail vendor. Another entity in the Flipkart universe is Flipkart India, a 100% subsidiary of Flipkart Limited (Singapore). The mammoth Walmart investment was made in this Singapore entity, which is also home to Flipkart’s other international investors like Microsoft, Tiger and Tencent.

To understand this, another FDI angle must be explored: the multi-brand wholesaler is permitted 100% FDI under the automatic route, as long as it doesn’t sell directly to consumers. Here, Flipkart India (also fully owned by the Singapore entity) is a back-end entity, operating as B2B Wholesaler.

The front-end (registered as Flipkart Internet- 100% owned by the same Singapore entity) operates as a multi-brand marketplace. Thus, Flipkart India acts as a wholesaler that sells on Flipkart-.com (a marketplace), which is owned by Flipkart Internet. All entities, in turn are owned 100% by Flipkart’s Singaporean holding company. This front-end back-end model is the second model Indian players have deployed to bypass FDI limitations.

And this mechanism is not unique to Flipkart: BigBasket operates on a similar model. The frontend entity at BigBasket, which owns and operates the online marketplace, is one Innovative Retail Concepts (wholly Indian owned), while the back-end —Supermarket Grocery Supplies (SGC) is the wholesaler. Like at Flipkart, key investors like Alibaba, Ascent, Abraaj, Helion and IFC own stakes in at the SGC level.

These FDI manoeuvres, while tough to follow, have served India well. In their absence, our retail landscape would have likely remained infinitesimal compared to the scale it enjoys today.

The critical question here is not how or why these companies jumped through these hoops, but instead, why they had to do so in the first place. Regulation must remain cognizant of the capital needs of an economy. If not, water does end up finding its level, and often, it is not the level lawmakers had in mind to start with.


The author is an independent TMT advisor to NovaDhruva, funds and startups, and the president of his MIT Alum class





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