E-commerce company or Software Company ? To be or Not to be

Kishor Biyani’s salvo in the High Court against  100% FDI for E commerce companies has put the cat delhi-high-court-asks-centre-on-appointment-of-information-commissioners-450x300among the pigeons .Wonder where he was ,when they were busy building their nests .Now Kunal Bahl Co-founder is making press statements .

Snapdeal is not an online retail company but a software firm that merely enables other retailers and small & medium enterprises to sell products through its platform.

However this is what the Snapdeal Meta-description says Snapdeal: Online Shopping in India for Men, Women & Kids. Shop online for Mobiles, Laptops, Appliances, Clothing, Footwear, Home Furnishing & more. Free Shipping, Cash on Delivery & EMI* options available in India. Legal Speak and User Speak . Idea is not to spotlight anyone .Snapdeal ,Amazon and Flipkart are all part of this play.

Why do E Commerce companies want to posture as software firms ?

You don’t have to look too far .100 per cent Foreign Direct Investment (FDI) is allowed only in business-to-business (B2B) e-commerce and not in retail segment or B to C Commerce. The problem starts when a B2C e-commerce company operates through the marketplace model but uses their other FDIfunded ventures in the B2B space for retail sales. The huge discounts given by these firms for retail sales have spurred FEMA investigations and at least Flipkart was under the enforcement directorate lens   for an alleged violation of rs 1400 Crores . The potential liability could be three times this level

Kishore Biyani describes this best and I reproduce from his Economic Times article

India bars foreign direct investment (FDI) in any e-commerce venture that sells products directly to consumers but allows 100% foreign capital in the marketplace model, which involves online retailers setting themselves up as platforms for other retailers to sell products. In effect, this means that these companies are selling to consumers and this doesn’t count as wholesale trading Biyani said.

“By legal definition, wholesale trading or B2B (business to business) involves selling only to those who own businesses or have sales tax or service tax registration. The websites do not have any B2B or wholesale business,”he said.

Now they are not B to B Marketplace as they are not selling to businesses that have sales tax or service tax registration .But they are facilitating sales for Sellers .Look carefully at your E Commerce Orders ,the Invoice will not be from Flipkart or any such E-commerce entity .So what are they ? As Kunal says they are Software firms .This makes sure they are not seen as a controversial marketplace also .Why is he seeking this definition ? Here is the answer ,as per the Retailers Association of India (RAI) to the Delhi High Court  based on a World Trade Organization definition, transactions involving selling to “general public”, especially through a shopping cart, are a B2C transaction. It further says that e-tailers are “arranging their affairs in a manner to circumvent the said regulation by inviting FDI into themselves and purporting themselves to be only a ‘marketplace’.” Clever ,but likely to last only for four months edlekarna.cz.The Delhi high court on 27/05/15 asked the government to consider a plea by the Retailers Association of India (RAI) for parity in foreign direct investment (FDI) norms between e-tailers and retailers.It directed the government to give a decision in four months.

Heavyweight Alignments  E-tail Majors and Physical Retail Majors .Consolidation Likely post September ,2015 Judgement on FDI in E-commerce

  • Amazon and Future Group
  • Croma and Snapdeal

These alignments took place in  October ,2014 ,indicating some kind of truce .But it looks like Croma and Future are hedging their bets. They are attacking through RAI ( 900 Retailer strong association) and cutting deals with the competition.If the ruling in September 2015 goes in favor of RAI it will trigger a wave of Physical and E-tail consolidation and realignment.With the ability to raise FDI capital themselves ,the RAI retailers will be able to cut deals and en cash some of the inflated valuations of the e-tailing sector in India.

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