Indian e-commerce: Tipping the scales

Regulatory overhauls are almost never the subject of universal praise, and reactions to India's draft e-commerce policy have run the usual gamut, with some industry participants applauding the proposals that leaked earlier this month and others calling for the entire framework to be scrapped.

Most prominently represented in the latter group are industry leaders Amazon and Flipkart, which is also unsurprising; those who have mastered the rules of a system are rarely enthusiastic about changing them. But beyond the self-interest of giants trying to protect their own positions lies a concern shared by many other industry observers.

"I don't think the reactions from the likes of Amazon and Flipkart are unreasonable," says Ashish Fafadi, CFO at Blume Ventures. "The policy poses a clear challenge for players that have significant foreign investment or are foreign-owned. While the government is bidding to create a level playing field for Indian e-commerce companies and offline retailers, there's a fear that it will end up hurting the customer's ability to get the best of what is on the table."

Few e-commerce players outside of Amazon and Flipkart would claim that a unified regulatory framework isn't required, but questions about its practical application are valid. While policymakers have done their best to update the rulebook to fit new economy business models, they have inevitably failed to keep pace with the innovation of the companies they are supposed to regulate. This in turn creates issues for the e-commerce operators themselves, as they seek clarity on what departments are responsible for oversight.

"There are multiple policymakers and regulators within the government that pertain to e-commerce, such as the Department of Industrial Policy & Promotion (DIPP), Income Tax Department, and the Reserve Bank of India," says Vinayak Burman, a managing partner at boutique law firm Vertices Partners. "This creates ambiguity relating to taxation, investment, technology transfers, and data protection. The need of the hour is for a consolidated legal framework to deal with all these hitches." 

Problematic process

Establishing such a framework was the impetus behind the launch of a government think tank headed by Suresh Prabhu, the commerce minister. The membership has not been revealed, but it reportedly includes representatives from domestic telecommunications giants such as Bharti Enterprises and Reliance Jio, industry bodies like the Internet & Mobile Association of India, and online businesses such as MakeMyTrip, Ola, and Urban Clap.

Notably, Amazon and Flipkart were not part of the discussions, which may account in part for their rejection of the draft policy. But their concerns over the wide-ranging proposals are shared in milder form by many of their peers.

"From having talked to participants in the ecosystem, my sense is that a lot of aspects haven't been thought through," says Rahul Chowdhri, a co-founder of Stellaris Venture Partners. "Some of these policies make sense, like data localization, but other measures, such as trying to differentiate between e-commerce and offline retail, are less practical when many e-commerce companies are building physical stores and offline retailers are establishing a digital presence."

The distinction between online and offline operations is a relatively minor issue for stakeholders. More troubling is the perception that most of the proposals will disadvantage the likes of Amazon and foreign-invested players like Flipkart – now controlled by Walmart – and Paytm, which counts China's Alibaba Group as a significant backer.

They cite several examples in support of their concerns. First, the draft states that only Indian-owned and Indian-controlled firms that sell 100% domestically-produced goods would be allowed to use the inventory model. Second, there would be differential voting rights for Indian founders, giving them more control over companies even when they hold minority stakes. Third, regulators would be able to ban e-commerce operators' group companies from buying branded goods in bulk for resale if it is seen to distort prices. As the largest players in the market, foreign-backed companies would be disproportionately affected.

Flawed argument?

The argument for privileging Indian-backed companies is straightforward. Companies such as Walmart and Amazon are seen to have an advantage, since they can afford to operate at a loss in India with the support of their overseas interests – particularly given the price wars that have characterized India's e-commerce sector.

However, creating hurdles for companies backed by foreign investment has the potential to cut off an important source of growth capital for Indian e-commerce. Industry stakeholders warn that taking this approach too far could cripple domestic operators trying to reach their next stage of development. 

"The Indian ecosystem has been several steps behind in terms of creating a local environment for risk capital investment like China or Israel," Fafadia says. "That has led to these companies largely being foreign-backed. I don't think the idea is to hurt these foreign players. We have never been a country that has shut its doors to foreign participants, and we should not be doing it going forward."

Despite concerns over the current policy direction, the government has pledged to reach out to stakeholders for more input. Because there is a general election in May, and no major policy changes are allowed in the six months before the country votes, the chances of the proposals being finalized in the near term are slim.

"I wouldn't imagine anyone trying to pack their bags because of this change," Fafadia adds. "Most of the mature foreign players with long-term interest in India will engage with it and make sure they're consulted, and this government has been receptive to feedback in the past. While it's something that could have been done better and I'm hopeful the final policy will address it, I'm not overly worried."   

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• Topics
• South Asia
• Technology
• Consumer
• Regulation
• India
• Blume Ventures
• Stellaris Venture Partners
• TMT