Foreign investment in retail e-commerce: The way to go?

The new favourite for private equity and venture capital investors today seems to be e-commerce. Not only has China’s giant online trading company, Alibaba, had one of the most successful IPOs in recent history, the e-commerce sector in India is not far behind. With Flipkart’s recent acquisition of Myntra, and huge investments by Amazon and other portals, online trading or e-commerce in India is on the rise. The country’s e-commerce sector is estimated to have grown from US$3.8 billion in 2009 to US$12.6 billion in 2013, for at a compound annual growth rate of 35%.

Restrictions in India

In light of the recent investments by major global players, the foreign investment laws of India governing e-commerce have been in particular focus. While 100% foreign direct investment (FDI) in e-commerce has been permitted under the automatic route since 2000, it is restricted to business to business (B2B) activities only.

Looking at the evolution of this provision, it initially came with the condition that 26% of the equity should be divested in favour of the Indian public in five years, if the company was listed globally. At that time FDI in wholesale trading was permitted under the approval route and there was a complete prohibition on FDI in retail. Therefore, while B2B e-commerce was allowed without any approval (thereby allowing companies to make wholesale deals electronically), for FDI in brick-and-mortar wholesale stores, prior permission of the government was required.

Anubhuti Agarwal is a partner and Tanvee Nandan is an associate at Amarchand & Mangaldas & Suresh A Shroff & Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.