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Indian ecommerce companies to face legal challenges
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India’s $11bn — and rising — eCommerce industry is facing a serious threat. But it is not Amazon, nor any other external company planning to enter the sector. It is the country’s own bricks-and-mortar retailers, who have accused online marketplaces of breaching complex rules on foreign direct investment.

Homegrown websites, such as Flipkart, Snapdeal, and Paytm, continue to grow rapidly, albeit from a relatively small base. While online channels account for less than 1 per cent of the total Indian retail sales, according to research by UBS, forecasts for the value of goods sold via online marketplaces are rocketing upwards.

Earlier this year, Bank of America Merrill Lynch raised its target for the gross merchandise value (GMV) of Indian eCommerce, estimating that it would reach $220bn by 2025, from a level of $11bn today.

Consultancy firm Technopak calculates online sales already account for 18 per cent of the total in the most popular shopping categories — such as consumer electronics, apparel and furniture — posing a threat to India’s legion of independent ‘mom and pop’ retailers.

Outside investors have taken notice. In the past two years, India’s online marketplaces have together raised more than $5bn from backers including Japan’s Soft Bank, China’s Alibaba, and US-based Tiger Global Management.

However, by accepting this financing, the online marketplaces now stand accused — by a group of angry conventional retailers — of breaching an Indian ban on types of foreign direct investment.

A lawsuit issued by the All-India Footwear Manufacturers and Retailers Association has accused prime minister Narendra Modi’s administration of turning a blind eye to “rampant illegalities” in the eCommerce sector, and asked the Delhi High Court to prevent these companies from selling directly to consumers. A similar suit has been filed by The Retail Association of India, demanding an equal footing for all retailers.

Initially, the court declared that there was “prima facie” evidence that investment rules had been broken, and has ordered the Enforcement Directorate — a government investigative agency that prosecutes violations of foreign currency laws — to report by December 21.

Flipkart, Snapdeal and Paytm declined to comment on the lawsuit but have previously argued that they comply with the country’s laws.
If, however, the court upholds the allegations, it could spell big trouble for some of the country’s most dynamic companies — and embarrass the Modi government as it tries to assure international investors that India is a predictable place to do business.

For the online marketplaces, the problems stem from India’s differing rules on foreign participation in various categories of retail activity.
India allows foreign retailers — such as Gap, Benetton, H&M and Ikea — to own their own stores, where they sell only their own-branded merchandise. But the country has a de facto ban on foreign direct investment in supermarkets, department stores or other retailers selling items from multiple brands.

It also specifically bans foreign investment in eCommerce companies selling direct to consumers, although it does permit foreign direct investment in business-to-business oriented eCommerce platforms.

E commerce groups insist they comply with the country’s laws, and that they are merely technology platforms operating electronic “marketplaces” that connect independent sellers with customers.

Industry experts say, however, that such claims may not withstand the scrutiny of India’s courts, if doggedly challenged by aggrieved brick-and-mortar retailers.

“In terms of what the books of eCommerce companies show, it is very difficult to say they are not a pure technology company,” says Anurag Mathur, who leads the PwC retail and consumer practice in India. “In spirit, though, you could say they are not fully in the spirit of the law. It will be very, very open for the court to interpret.”

Another industry expert says India’s large online marketplaces exhibit the defining characteristics of retail businesses: curating their product offerings and controlling pricing.

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“It’s not a pure technology play,” says the analyst, who asked not to be named given the sensitivity of the issue. “A pure marketplace, by definition, should allow anybody to list anything — if you want to list your watch, and I want to list my socks. But, here, there is a certain cu-ration of what can go there — and that is essentially what retail is.”

Amazon, which has announced plans to investment $2 Billion in its fast-growing Indian arm, has previously warned investors that its Indian division is subject to “unique risks”, given the legal uncertainties.

It is an awkward situation for Mr Modi. While in opposition, the prime minister’s Hindu nationalist Bharatiya Janata party strongly opposed foreign investment in multi-brand retail, which it argued would threaten millions of so-called mom-and-pop shops, whose owners are traditionally staunch BJP supporters.

But his administration is loath to see any disruption to high-profile companies now considered an emblem of modernizing India. Government probes launched during the previous Congress administration into Flipkart, and fashion retailer Myntra, for alleged violation of FDI rules appear to have been quietly buried.

“We want these industries to flourish,” said Amitabh Kant, secretary in the Commerce Ministry. “We will not allow them to fail.”
Debashish Mukherjee, partner and head of the retail practice at AT Kearney in India, says the government should “clarify” whether it sees eCommerce companies as merely “electronic facilitators” or as retailers themselves — but also ensure fair treatment for traditional retailers.
“The government should make this a quick-win area,” he says. “The momentum is already behind this sector — there is capital, people wanting to do it, and consumers love it.”

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