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Last year's $ 16 billion purchase by Flipmart's Indian e-commerce platform by Walmart seemed to show the country that it was rolling out the red carpet for foreign investors. Today, the US retailer and fellow Amazon – who have spent US $ 5 billion on operations in India since 2012 – have found the carpet ripped off. The new rules that came into effect last Friday in New Delhi and unveiled five weeks earlier will disrupt their business models and reduce the return on their investments.
Although the Walmart deal – which made it the largest foreign investor in India – brought nearly $ 2 billion in tax revenue to New Delhi, in fact, India has long been ambivalent about direct investment foreigners in the retail trade. In appearance, he worries about the impact on millions of small family-owned stores that dominate the Indian retail industry.
The ruling Bharatiya Janata ruling party of Prime Minister Narendra Modi is also sensitive to the powerful traders who control the wholesale and distribution trade. They fear being forced by any modernization of India's fragmented and inefficient supply chain. They also happen to be traditional supporters of the BJP.
New Delhi's complicated policies allow full foreign ownership of "single-brand" retailers, such as Gap or Ikea, but restrict it to "multi-brand" retailers – by removing foreign supermarket chains. India also allows foreign ownership of multi-brand wholesalers selling to businesses, but not to individuals.
Many e-commerce start-ups, often backed by foreign venture capital, have paid little attention to these distinctions. In 2016, New Delhi clarified the rules. It allowed foreign-backed companies to manage online marketplaces – connecting independent sellers with customers – but not to maintain inventory or sell products directly to the consumers themselves.
Retailers benefiting from foreign support found solutions that appeared to comply with the letter of the rules, although traders complained of having violated the spirit. Flipkart has set up a wholesale distributor, Flipkart India, which provides affiliate sellers. Amazon took 49% of the joint venture that owns Cloudtail India, Amazon's largest seller in the Indian market.
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But with the elections coming up, Mr. Modi radically changed the rules or, in the words of the government, clarified the rules. In an online market financed by foreign funds, no seller may stock more than 25% of its inventory with a market-related wholesaler or any of its shares held by the market or badociated companies.
Amazon and Flipkart need to quickly restructure their operations. Merchants are jubilant, but the biggest winner could be Mukesh Ambani's Reliance Retail, which is preparing its own e-commerce portal and is unaffected by the regulations.
Critics say that Flipkart and Amazon have aggressively exploited the ambiguities of the previous rules, which allowed them to engage in wholesale activities, practicing predatory pricing by their local competitors, generating revenues well above those of the supposed markets. to be their main activities.
Yet, New Delhi has never contested such arrangements; Officials badured Walmart that they had no problem with Flipkart's operations. The Indian competition authority approved the takeover in August.
Making sudden changes, and rules restricting foreign but not domestic actors, sends unfortunate signals to international investors. Pricing practices are best controlled by effective competition regulation and not by ownership restrictions. The new e-commerce rules could help protect small Indian retailers. But they will strengthen the country's reputation, not for the treatment of investors on the red carpet, but as a risky and unpredictable place to do business.
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