India Stays Firm on Foreign Direct Investment Ban in Retail Ecommerce

Indian Prime Minister Manmohan Singh

The Indian Government has dug its heels in on the ban on foreign direct investment in retail ecommerce in the country. The Manmohan Singh led UPA government had earlier allowed Foreign Direct Investment in brick and mortar retail in India. However, it clarified that the permission to accept FDI does not apply to ecommerce businesses.

On Monday, Minister of State of Commerce & Industries, S Jagathrakshakan  said in the Lok Sabha

As per the extant Foreign Direct Investment (FDI) policy, FDI, up to 100%, is permitted under the automatic route, in business-to-business e-commerce. Retail trading, in any form, by means of e-commerce, is not permissible for companies with FDI. No proposal for amendment of this policy, is under consideration.

Ecommerce in India is a nascent industry and has seen heavy foreign investment in the last 3 years. However, the Government’s stance makes it difficult for them to have straight forward operations.

Most ecommerce companies that have received foreign funding operate with a two tier structure. The front end is owned by an Indian entity while the back end which supplies and imports products to which the foreign investment is made is usually a foreign entity.

To comply with the foreign direct investment norms in the country, the poster boy of India’s ecommerce stor Flipkart, sold its front end operations to a group of investors led by former OnMobile Chief Operating Officer Rajiv Kuchhal.

Flipkart incorporated a new parent company in Singapore which owns the back end to which all foreign investments are being made while the front end, which has a licensing agreement with the Singapore company to use technology and the Flipkart brand to do business in India.

The Indian government is probing Flipkart for alleged violation to the FDI norms.

American ecommerce giant Amazon has been pushing hard to gain access to the $400 bn Indian retail market. In February, Amazon’s global Vice President Paul Misener met India’s trade minister Anand Sharma and discussed the creation of a favorable policy environment for Amazon to do business in India, which is otherwise not allowed in the country. Amazon presently sells its Kindles in India and recently started selling digital goods like ebooks in the country. However, it does not have full fledged retail operations in the country yet.

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