Tuesday, July 15, 2014

ई कामर्स फंडा खुदरा कारोबार में अबाध विदेशी पूंजी का वोट बैंक से धोखाधड़ी का नायाब नूस्खा

ई कामर्स फंडा खुदरा कारोबार में अबाध विदेशी पूंजी का

वोट बैंक से धोखाधड़ी का नायाब नूस्खा
पलाश विश्वास
India's FDI policy permits FDI up to 100% in e-commerce activities, but this is dependent on a very crucial stipulation– the policy applies only to companies engaged in B2B e-commerce, and not to those in retail trading.5 It is at this point that classification of online retail businesses into B2B and B2C e-retail becomes significant.
In B2B e-retail, trading is between business entities such as manufacturers and wholesalers or between wholesalers and retailers. India permits 100% FDI in B2B e-commerce under the automatic route.6 In B2C e-retail, online businesses sell directly to the consumers. The FDI policy provides that retail trading, in any form, by means of e-commerce, would not be permissible for companies with FDI and engaged in the activity of single brand retail trading or multi-brand retail trading. Therefore, it is clear that the extant FDI policy does not permit FDI in B2C e-commerce.7
This restriction on foreign investment in B2C e-retail has forced many online business entities with foreign investment to adopt the marketplace model. In this model, the online company runs a website which provides the marketplace— a platform for business transactions between buyers and sellers. In return for the services provided, the online company earns commission from the sellers.8 In this model, ownership of inventory vests with the enterprises (also the ultimate sellers) which advertise their products on the online company's website.9 Thus, the marketplace model is compliant with the FDI policy of India as the online business entity providing the marketplace does not involve itself in any retail transaction or any direct sale to the consumer.( Atreyee Sarkar PSA Legal Counsellors)

सर्वविदित है किबहुब्रांड रिटेल एफडीआई का ऐलान करने के बाद भी मूलतः भाजपा के कड़े प्रतिरोध और राजनीतिक बाध्यताओं की वजह से उसे अंजाम तक पहुंचाने में नाकाम रहे डा.मनमोहन सिंह।

खुदरा बाजार में एफडीआई का नया तरीका डिजिटल इंडिया में ईकामर्स का फंडा है।

गौरतलब है कि मौजूदा मानदंड के हिसाब से देश में जो ई.कामर्स करने वाली कंपनियां व्यापारियों के बीच होने वाले व्यापार में संलग्न हैं और खुदरा कारोबार नहीं करतीं उनमें सौ प्रतिशत एफडीआई की अनुमति है।

इसी प्रावधान के मुताबिक ईकामर्स के महाविस्फोट के जरिए खुदरा कारोबार में विदेशी पूंजी का बिग बैंग करने का केसरिया कारपोरेट प्रकल्प है।

ताकि सांप भी मर जाये और लाठी भी न टूटे।अमेरिका हित भी सधे और स्वदेशी का अखंड जाप भी जारी रहे।वौॉबैंक बुरबक बनाओइंग का यह नायाब नूस्खा है।

टाइम्स नाउ अभी अभी खोलकर बंद किया है क्योंकि वहां अर्णब कश्मीर  संकट पर दहाड़ रहे हैं और संसद में वैदिकी प्रलय है।

मोदी के खिलाफ जिहाद का ऐलान करनेवाली ,चुनाव के दौरान मोदी को कमर में रस्सी डालकर जेल में डालनेवाली ममता दीदी की तृणमूल पार्टी समेत  पूरी बहुरंगी इंद्रधनुषी राजनीति मोदी के सुधार कार्यक्रमों की अनिवार्य संसदीय अनुमति के अनुकूल हैं।

मजे की बात है कि मीडिया कोई सूचना दे रहा नहीं है।राजनीति बंजर रेगिस्तान है।लोकतंत्र का तमाशा भी यह कि संसद के बजय सत्र पर बजट पर चर्चा हो नहीं रही है,वैदिकी सभ्यता को लेकर घमासान है।


आज लिखने का मन नहीं है,फिर भी लिख रहा हूं।मुद्दे बेहद जरुरी हैं,जिन्हें संसदीय शैली से स्थगित किया नहीं जा सकता।

अपनी पीसी पर नहीं हूं।गोलू और पृथू के कंप्यू से लिख रहा हूं जो अब दिल्ली में दाखिला लेंगे।दोनों बच्चे हमारे अच्चे प्आरे दोस्त हैं।

अपने फिल्मकार राजीव कुमार कोलकाता से नई दिल्ली फिल्म डिवीजन स्थानांतरित हो गये हैं।काम संभाल लिया है।अब घर भी स्थानातंरित करने वाले हैं।आखिरीबार उनके कलकतिया घर में हूं।

इससे पहले पिछली  बार जब मैं नये कोलकाता में सिंहीबाड़ी के इस घर आया था तो राजीव और मैं कालिकापुर में बचे हुए धान खेतों और जंगल में भटकते हुए अपना बचपन खोज रहे थे।

अब राजीव बचपन के करीब पहुंच गया है।नई दिल्ली से पीलीभीत आठ
घंटे की दूरी पर है,जहां बाबूजी और अम्माजी हैंं तो नैनीताल, नैनीताल समाचार ,डीएसबीकालेज, नैनीझील और युगमंच की दूरी भी कमोबेश इतनी ही होगी।

मेरा गांव बसंतीपुर दिल्ली से करीब साढ़े छह घंटे की दूरी पर है और कोलकाता से एक हजार मील दूर।

मैं अपने गांव और अपने पहाड़ को छू भी नहीं सकता।

कल राजीव का सारा सामान दिल्ली रवाना हो जायेगा।अगले मंगलवार को वे दिल्ली में बस जायेंगे।

कोलकाता जब आया था ,एकदम अकेला था।मुकम्मल एक भूकंप से गुजरकर आना हुआ था।पूरा गढ़वाल तब भूकंप के चपेट में था।

राजीव कुछ ही अरसे पर कोलकाता आ गया था।राजीव की घर वापसी के बाद फिर अकेला हो गया हूं।

इस बीच मुंबई से कर्नल सिद्धार्थ बर्वे आ गये हैं।लेकिन वे इतने बिजी रहते हैं और फुरसत मिलते हू मुंबई भाग निकलते हैं कि राजीव की कमी खलती रहेगी।

अब हम उन धान के खेतों में भी टहल नहीं सकते।

कोलकाता के इस हिस्से में मेट्रो की भारी हलचल है और बाकी हिस्सों की तरह चप्पे चप्पे पर कारपोरेट बाड़ाबंदी है।

नई दिल्ली की आबादी ढाई करोड़ की हो गयी है।दिल्ली की बढ़त यूपी,उत्तराखंड और हरियाणा को भकोस रही है।

कोलकाता और बाकी महानगरों की भी वही दशा दिशा है।

सामने ही मेट्रो कैश एंड कैरी है,जिसका वाम जमाने में शुभारंभ हुआ था भारी विरोध के साथ।यह कंपनी हालांकि खुदरा नहीं,थोक कारोबार करती है।

यहां बाईपास पर किराने की दुकानें सिरे से गायब हो गयी हैं।बाजार भी नजर नहीं आते।कतारबद्ध दुकाने नहीं हैं।हास्पीॉल हब है।एजुकेशन हब है।शापिंग कांप्लेक्स हैं। बड़े बड़े अस्पताल हैं और उतने ही बड़े बड़े शापिंग माल मल्टीप्लेक्स।


भारत के देहात का यह भावी इतिहास और भविष्य भूगोल है।

साइंस सिटी से सोनारपुर तक कहीं कही धान ,मकई और सब्जियों के खेत अब भी दिख जायेंगे।लेकिन हर कहीं गगनचुंबी कंक्रीट का भयावह अरण्य है,जहां गांव,कस्बे और शहर की खुशबू नहीं है।फाइव स्टार होटल जरुर हैं।

मकई का खेत फाइव स्टार होटल,रिसार्ट और मरती हुई झीलों की लाशें।

वैदिकी की पाकिस्तान यात्रा निजी रही होगी।

हो सकता है कि वे वहां नमो महारज के नुमांइदे भी नहीं रहे होंगे।

भारतीय दूतावास भी उनकी गतिविधियों से अनजान रहा हो और पाकिस्तान की सरकार मोदी से दोस्ती की गरज से इस संघी पत्रकार को आजाद पत्रकारिता की पूरी इजाजत दी हो।

आजाद पत्रकार को किसी से भी मिलने की इजाजत होनी चाहिए और कलम पर अंकुश न हो और जुबान पर ताला भी न जड़ा हो,यह लोकतंत्र का तकाजा है।

जब प्रशांत भूषण के बयान पर चुनाव पूर्वे हंगामा बरपा था तब भी हमने लिखा था कि कश्मीर अब भी भारत का अंग है और उस पर कोई भी भारतीय नागरिक को अपने विचार रखने का हक है।

हमारे हिसाब से दोनो कश्मीर के एकीकरण और फिर उसकी आजादी के हक में वैदिकी विचार उतना बड़ा राष्ट्रद्रोह नहीं है,जितना विदेशी पूंजी को देश बेचने के कारोबार का इसे अंब्रेला बना देना है।

बजट सत्र का यह गजब डायवर्सन है।

मीडिया जनात को वैदिकी संस्कृति में निष्णात करने का पुण्यकर्म कर रहा है।

कश्मीर के बहाने उग्र हिंदू राष्ट्रवाद का आवाहन है और इस नजरिये से कश्मीर बाकी देश के लिए गाजा पट्टी है।

संघ परिवार ने संसदीय सत्र के दौरान एफडीआई,विनिवेश और दूसरे तमाम मुद्दों के खिलाफ बेहद शातिराना ढंग से यह वैदिकी पैट्रियट तैनात कर दिया है,इस तरफ भी गौर करें।

अब जो हो पूरे बजट सत्र में कम से कम बजट पर चर्टा न हो,ऐसा इंतजाम हो गया है।सबकी अपनी अपनी राजनीति जारी रहेगी।

संसद से बाहर एक सुर और संसद के भीतर अलग अलग सुर में समवेत गान विकास का।

हो सकता है कि वह बहुचर्चित सोशल मीडिया फोटो प्रचार पाने की ललक ही न हो,जैसा जोर शोर से कहा जा रहा है।

बल्कि इस क्रांतिकारी केसरिया पोस्टिंग की टाइमिंग से पता चलता है कि यह विसुद्ध वैदिकी कार्रवाई तमाम करोड़पति अरबपति सासंदों को जनता के मुद्दों को संबोधित करने,राष्ट्र की सरकार के एफडीआई विनिवेश सुधार राष्ट्रद्रोह पर चर्चा की तकलीफ न देने के लिए संघ परिवार की ओर से एक और मनोरंजक रियेलिटी शो की प्रस्तुति है।

संवेदनशील तमाम सेक्टरों में एफडीआई में प्रतिरक्षा के अलावा भारत के खुदरा बाजार पर अमेरिकी दांव सबसे ज्यादा है।

और मजे की बात है कि बनिया पार्टी अब तक अपने कारोबारी वोटबैंक के हितों के मुताबिक इसका सबसे ज्यादा विरोध करती रही है।

मनमोहन सरकार के फेल होने की बड़ी वजह यह असंभव रिटेल एफडीआई है।

भूमि सुधार कानून को खत्म करने की पूरी तैयारी है और दूसरे कानून भी बदले जाने हैं,जिनपर हम सिलसिलेवार लिखते रहेंगे।

लेकिन भारतीय जनता को ई कामर्स मार्फत मल्टी नेशनल कंपनियों को रिटेल कारोबार का एक तिहाई कब्जाने का फंडा बताना जरुरी है।

संसद में जाहिर है कि एफडीआई और विनिवेश से लेकर रियल्टी सरकार की हर पेशकश को सर्वानुमति तय है और वैदिकी तमाशे के अलग अलग संसकरणों के सीरियल युद्ध से इस नाटक का भी पटाक्षेप हो जाना है तो जनता को आखिर कैसे मालूम हो कान कैसे घूमाकर पकड़कर बनिया पार्टी सरकार ने अपने सबसे मजबूत केसरिया वोटबैंक के कत्लेआम का स्थाई बंदोबस्त मुकम्मल कर दिया है।

बायोमेट्रिक डिजिटल नागरिकता और नागरिकता संशोधन कानून के बारे में हम पूरे एक दशक से ज्यादा वक्त से लिख बोल रहे हैं,कोओी समझा भी है कि नहीं मालूम।

अब इसे एक सूत्र में समझें कि  केसरिया कारपोरेट सरकार का जो बुलेट हीरक चतुर्भुज सेज गलियारा इंफ्रास्ट्रक्टर समन्वय है ,वह जैसे विशुद्ध छिनाल सांंढ़ संस्कृति का रियल्टी प्रोमोटर बिल्डर विदेशी पूंजी वर्चस्व का नजारा है और आदिगंत एथनिक क्लींजिंग है,नस्ली कत्लेआम,जल जंगल जमीन नागरिकता,आजीविका, रोजगार पर्यावरण से बेदखली है जैसे वह,उसीतरह डिजीटल इंडिया का मतलब है रिटेल एफडीआई डायरेक्ट टू होम है।

इसे इस तरह समझें कि मेट्रो कैश एंड करी के पंजीकृत बड़े बड़े थोकदार हैं और उन्हें रिटेल की अनुमति नहीं है।

वालमार्ट को रिटेल की अनुमति नहीं है,लेकिन फ्लिपकर्ट,फ्यूचर,अमाजेन,ईबे  समते सारी विदेशी कंपनियों को ई कामर्स की अनुमति है।

यानी ई कामर्स के जरिये रिटेल कारोबार डायरेक्ट होम डेलीवरी की अनुमति है।

बाजार लांघकर नेटवर्किंग के अमाय उपाय से बड़ा चमत्कार है यह।

हालांकि -कामर्स के क्षेत्र में एफडीआई की मंजूरी के बारे में मंत्री ने कहा कि वित्त मंत्रालय को इस बारे में निर्णय करना होगा। उन्होंने कहा, 'अभी इस बारे में अंतिम निर्णय लेना है...'' गांव गांव सूचना क्रांति माध्यमे से जोड़ दिये जाये तो न देशी बाजार की जरुरत होगी और न देशी उत्पाद की और  न देशी उत्पादन प्रणाली की।दिल मांग मोर तो मिलेगा।जो चाहो मिलेगा।

देशी थोक कारोबारियों को किनारे करके किराना दुकानों को सीधे एकाधिकार कंपनियों के रहमोकरम पर छोड़ने की कवायद जैसे हो चुकी है ,वैसे ही यह ईकामर्स ई रिटेल एफड़ीआई है।

गौरतलब है कि यूपीए जमाने में 27 जनवरी 2013 को एसोचैम के महासचिव डी एस रावत ने दूरसंचार और आईटी मंत्री कपिल सिब्बल को पत्र लिखकर बिजनेस..टु..कंज्यूमर :बी2सी: ई..कामर्स पर मौजूदा प्रतिबंध को हटाने में अपना समर्थन देने को कहा था। कपिल सिब्बल खुदरा क्षेत्र में एफडीआई लाने के प्रमुख पैरोकारों में से एक थे।


रावत ने तब कहा था कि इस क्षेत्र से आय वर्ष 2015 तक 15 अरब डालर के दायरे में पहुंचने का अनुमान है। इस निवेश का लाभ किसानों एवं अन्य घरेलू उत्पाद कंपनियों तक पहुंच सकता है जिससे उन्हें अपने उत्पादों का बेहतर मूल्य हासिल करने में मदद मिलेगी।

एसोचैम के महासचिव ने चीन का उदाहरण दिया जहां ई कामर्स ने करीब 500 चीनी कंपनियों को वैश्विक वेबसाइट के जरिये निर्यात करने की अनुमति है।

अब भारत में वैश्विक बहुराष्ट्रीय कंपनियों को भी वेबसाइट के जरिये बिजनेस..टु..कंज्यूमर :बी2सी: ई..कामर्स के तहत रिटेल कारोबार की इजाजत दे दी है बनिया पार्टी ने और देश अगर डिजिटल बन गया तो बिना रिटेल एफडीआई के भी बनिया पार्टी की सरकार बनिया दुकानों का सफाया कर देगी।

एकाधिकार पूंजी के अलावा डिजिटल देश में बिना एफडीआई खुदरा कारोबार से छोटे मंझोले से लेकर बड़े कारोबारियों का इंतकाल हो जाना तय है।

लेकिन संघ परिवार का यह कर्मकांड भी परम वैदिकी है क्योंकि नरेंद्र मोदी के प्रधानमंत्रित्व के दावे के साथ ही ई कमार्स फंडा मार्फते अमेरिकी कंपनियों को रिटेल अनुमति दिलाने की रणनीति तय ह गयी थी,अब उसका रोडमैप जो पहले से तैयार ता,उसीपर बुलेट ट्रेन टल पड़ी है।मोदी ने व्यापार संगठनों को चुनाव पूर्व ही चेता दियाथा कि ई कामर्स के जरिये वैश्विक प्रतिद्वंदिता के लिए तैयार रहे।

रक्षा,विमानन,बैंकिंग,बीमा,शिक्षा,चिकित्सा,परिवहन,निर्माण विनिर्माण, खनन, ऊर्जा, संचार,आटो,इलेक्ट्रानिक्स,इंजीनियरिंग,खाद्य,शीतल पेय समेत तामाम सेक्टरों में वैश्विक प्रतिद्वंद्विता का नजारा हम देख ही रहे हैं और अब रिटेल में भी क्लाउड साफ्टवेयर।

गौरतलब है कि बहु-ब्रांड खुदरा क्षेत्र में सुधार के बाद यूएस इंडिया बिजनेस काउंसिल (यूएसआईबीसी) ने पूर्ववर्ती  वित्त मंत्री पी चिदंबरम से ईकामर्स के जरिए भारतीय उपभोक्ताओं को प्रत्यक्ष विदेशी बिक्री (एफडीएस) पर लगी रोक हटाने और विदेशी कंपनियों को रीयल एस्टेट में प्रत्यक्ष स्वामित्व लेने की अनुमति देने को कहा था।

भारत में कारोबार कर रही अमेरिकी कंपनियों के शीर्ष निकाय ने वित्त मंत्री से कहा, "यूएसआईबीसी का मानना है कि खुदरा क्षेत्र के विकास में अगला कदम ईकामर्स के जरिए भारतीय उपभोक्ताओं को प्रत्यक्ष विदेशी बिक्री पर लगी रोक हटाना है।’’2013 के दौरान ही बजट पूर्व सौंपे जाने वाले 23 पन्नों के ज्ञापन में यूएसआईबीसी ने कहा कि भारत के खुदरा बाजार के लिए इस तरह के आनलाइन दृष्टिकोण से कई तरह से देश को फायदा हो सकता है।

सरकार ने अपनी ‘डिजिटल भारत’ पहल के तहत 500 करोड़ रपये का आवंटन करने की घोषणा की है। इसके तहत गांवों में ब्रॉडबैंड नेटवर्क लगाया जाएगा और हार्डवेयर तथा भारतीय सॉफ्टवेयर उत्पादों के स्थानीय विनिर्माण को बढ़ावा दिया जाएगा। वित्त मंत्री ने कहा कि विनिर्माण इकाइयों को अपने उत्पाद रिटेल और ई कामर्स प्लेटफार्म के जरिये बेचने की अनुमति होगी।लेकिन यह अनुमति दरअसल बहुराष्टॉरीयएकाधिकारवादी कंपनियों को होगी।

मजा इसमे यह भी है कि देशी खुदरा बाजार के सफाये के इस बहुराष्ट्रीयतंत्र को रोजगार सृजन से जोड़ा जा रहा है और महिमामंडल यथा हैः

घरेलू ई-खुदरा क्षेत्र की प्रमुख कंपनियों अमेजन और फ्लिपकार्ट द्वारा अपने कारोबार का आक्रामक तरीके से विस्तार करने की रणनीति से इस क्षेत्र में नियुक्तियां 30 प्रतिशत से अधिक बढ़ेंगी।

इससे इस क्षेत्र में अगले दो-तीन साल में 50,000 रोजगार के अवसरों का सृजन होगा।
अब थोढ़ी पीछे लौटें,
    
मानव संसाधन क्षेत्र की प्रमुख सलाहकार कंपनी रैंडस्टैड इंडिया ने कहा कि इस क्षेत्र में अगले कुछ साल में नियुक्तियों में 20 से 30 प्रतिशत का इजाफा होगा।

इस बाजार में घरेलू ऑनलाइन स्टार्टअप और ईकामर्स बहुराष्ट्रीय कंपनियों के भारतीय बाजार में प्रवेश से इस क्षेत्र में रोजगार के अवसरों में इजाफा होगा।
  
एक अन्य मानव संसाधन फर्म यूनिसन इंटरनेशनल ने कहा कि पिछले कुछ साल के दौरान ई कामर्स क्षेत्र में नियुक्तियों की रफ्तार काफी धीमी रही है। हालांकि अब कई खुदरा ब्रांड अपने कारोबार को ऑनलाइन ला रहे हैं, जिससे पिछले साल की तुलना में इस साल नियुक्तियों में 33 प्रतिशत बढ़ोतरी की उम्मीद है।
    
जिगसा अकादमी के निष्कर्ष के अनुसार अगले तीन साल में ई कामर्स क्षेत्र में डाटा विश्लेषक पेशेवरों के पदों पर 15,000 से 50,000 नियुक्तियां होंगी।
   
हाल में घरेलू ई कामर्स क्षेत्र में एक बड़ा विलय सौदा मिन्त्रा व फ्लिपकार्ट में हुआ है।इसके अलावा एक अन्य घरेलू कंपनी स्नैपडील को नए निवेशक मिले है।.
   
वैश्विक ई कामर्स क्षेत्र की प्रमुख कंपनी अमेजन ने कहा कि यह उद्योग काफी तेजी से बढ़ रहा है और इसमें वृद्धि की काफी संभावनाएं हैं।     

एचआर सलाहकार मेराजॉब इंडिया के सीईओ पल्लव सिन्हा ने कहा कि यह क्षेत्र निश्चित रूप से धमाकेदार वृद्धि की ओर अग्रसर है।
कुछ पुरानी स्मृतियांः

केंद्रीय मंत्रिमंडल ने बहु-ब्रांड खुदरा कारोबार में 51 प्रतिशत प्रत्यक्ष विदेशी निवेश (एफडीआई) की मंजूरी दे दी है। इसका राजनीतिक दलों की ओर से भारी विरोध किया जा रहा है। विरोध करने वालों में संयुक्त प्रगतिशील गठबंधन (संप्रग) सरकार में शामिल राजनीतिक दल भी हैं और वे दल भी हैं जो सरकार को बाहर से समर्थन दे रहे हैं।
प्रमुख अमेरिकी अखबारों ने भारत द्वारा बहु-ब्रांड खुदरा कारोबार और विमानन में प्रत्यक्ष विदेशी निवेश (एफडीआई) को अनुमति देने के फैसले को पिछले दो दशक का सबसे बड़ा आर्थिक सुधार बताया है हालांकि आशंका जताई कि प्रधानमंत्री मनमोहन सिंह के नेतृत्व वाली संप्रग सरकार के लिए ये प्रस्ताव बड़े राजनैतिक जोखिम भरे हैं।




Jul 15 2014 : The Economic Times (Mumbai)
Is Flipkart Worth 10 Times Future Retail?




If Flipkart manages to raise funds at a valuation of $5 billion -negotiations are on, as ET reported last week -it will make India's largest online retailer about 10 times as valuable as India's largest listed brick-and-mortar retailer, Future Retail. This is despite Flipkart being much smaller in revenues, assets and physical presence.
In the US, e-tailer Amazon receives a market value of $2.1 for every dollar of its revenues, whereas Walmart receives $0.5. At $5 billion valuation, Flipkart's revenue multiple would be 5. Is that premium justified? And what does it signal about the future of retailing? Shelley Singh & Kala Vijayraghavan find out.
Jul 15 2014 : The Economic Times (Kolkata)
E-Tailing Creates Mexican Wave in India




The fast-growing online retail industry is set to take a larger chunk of the overall e-commerce market growing from the current 16% to 28% in the next two years, finds a study by advisory firm eTailing India. Growth of mobile shoppers is one of the main reasons behind this expected growth. Mobile shoppers will more than double to reach 220 million by 2016. Excerpts:







Jul 15 2014 : The Times of India (Kolkata)
Committed to lower taxes: Jaitley
Sidhartha & Surojit Gupta
New Delhi:
TNN


In His First Post-Budget Interview To A Newspaper, Finance Minister Hints At Increase In Charges Of Public Utilities, Reduction In Subsidies
The Modi government is committed to lower taxes, finance minister Arun Jaitley told TOI in his first interview to a newspaper after the Budget. It was an article of faith with him as well as the Prime Minister that lower taxes gave people money to spend which, in turn, fuelled economic growth, he said.
In this context, he clarified that the “bitter pill“ referred to by Modi didn't mean higher taxes. The rub could lie, he said, on people being asked to pay more for utilities. He said, “Bitter pill could mean that for utilities the user will pay for what they use. Unless users pay, utilities can't survive.“ This could mean higher electricity charges as well as a cut in subsidies.
Jaitley spoke at length on the Budget's direction. Indicating that the government would shun grandstanding on reforms and avoid political confrontations, he said he hadn't gone for “bold“ announcements that later came unstuck and had instead pushed for reviving the manufactur ing, real estate and tourism sectors.
He added that he had retained the UPA government's disinvestment policy as well as its social sector schemes and hoped to get its support for this.
The minister said while interest rates were the domain of the RBI, he hoped they would come down when inflation dropped as that would spur greater spending on housing. The sec tor has been hit by delayed projects and mounting inventory in the wake of the severe economic slowdown and high interest rates, he said.
Jaitley stoutly defended the controversial budgetary allocation of Rs 200 crore for a statue of Sardar Patel when several key schemes have received lower sums. He said the country had not returned its debt to “this great son“ and people with lesser con tributions have hundreds of institutions named after them.
He also said the decision to allocate Rs 100 crore for several schemes, a move which has faced strong criticism, was a “token“ amount to start a scheme and when these schemes acquire concrete shape more funds would be provided.
Even before he was asked about his reluctance to scrap the provision for retrospective taxes, Jaitley appeared to anticipate it and said that he had “cushioned“ against Parliament's ability to bring retrospective taxes and create fresh liabilities for corporates.
He also said the Modi government's reform agenda wouldn't be confined to the budget alone, and other measures could be taken from time to time. For instance, the hike in rail fares and extension of excise duty cuts for automobiles and white goods before the budget.
Asked if it was a `thanksgiving' Budget for voters who gave the BJP a sweeping majority in the Lok Sabha polls, he responded, “Partly it is because of my own and the Prime Minister's economic ideology of lower taxation, more economic activity , more spending and more saving.“




Jul 15 2014 : The Economic Times (Kolkata)
Why the Bansals are Worth 10 Times Biyani




Flipkart is valued at 30,000 crore, Future Retail at Rs 2,775 crore. Investors are assigning far greater market value to loss-making, asset-light online retailers than profitable, asset-heavy offline retailers. Is that premium justified and what does it portend for the future of retailing?
Shelley Singh & Kala Vijayraghavan report Successful online retailers will receive top valuations. Equally, in the absence of assets, those that don’t make it will be spectacular flameouts. tailers will never receive the valuations of online Growth for physical retailers is linear in nature. In order to sell to a buyer in, say, Jhansi, they need to set up a store there, hire staff and incur overheads. By comparison, an online retailer is servicing virtually every pin code in the country from its warehouses.
In the last round of funding it raised, this May, India’s largest online retailer was valued at $2.5 billion (about Rs 15,000 crore). And, as ET reported last week, Flipkart is now lining up its biggest round of fund-raising as a precursor to a possible American listing, and this time the valuation figure doing the rounds is $5 billion (Rs 30,000 crore).
If Flipkart manages that valuation, by itself, that would be a stunning double. It would be even more stunning when compared to all that surrounds it.
There is no comparison, especially in the brickand-mortal world.
Here, Future Retail was India’s first organised retailer, set up in 1994. This Kishore Biyani company, whose flagship is Big Bazaar, has a product span that matches, if not betters, Flipkart’s. As of March 2014, Future had 319 stores in 98 cities and towns, whereas Flipkart had six warehouses and zero stores. Future’s revenues were about two times and its assets 23 times that of Flipkart.
Future is profitable, whereas Flipkart is yet to post a profit.
Yet, at $5 billion, the company set up by Binny Bansal and Sachin Bansal (no relation) in 2007 would be 10.6 times more valuable than the operation that Biyani has assembled. “Investors look at the future,” explains Rachna Nath, leader, retail & consumer, PricewaterhouseCoopers. “Is there scalability in the business? Does it disrupt existing systems and processes? Here, online sellers score over offline retailers, and are valued more.”
How Much Premium?
Still, 10.6 times? In the US, Amazon earns a premium over Walmart -market value of $2.1 for every dollar of revenues versus $0.5 -but Flipkart is angling for a revenue multiple of 5. While the acknowledgement of e-commerce hitting a tipping point in India is universal, some advise restraint on how to value it and, by extension, what it says about offline retailers.
Sameer Sain, managing partner of Everstone Capital, a private equity fund, feels very few online retailers will succeed, as has been the case in the US. At present, in India, the emphasis is on scaling up quickly and raising capital to fuel cash burn.
Sain calls it a “dangerous game” for investors. “People are paying rich valuations for a very aggressive future promise,” says Sain.
“Unfortunately, investor psychology always creates a belief that it will be them who succeeds and that’s why so much money keeps flowing into this space.” Today, that money is principally looking at revenue growth. In financial year 2012-13, Flipkart saw its revenues surge 478%, against 65% for Future Retail. In 2013-14, it reportedly matched that to cross $1 billion in revenues. Flipkart is hitting a sweet spot, where it has customer stickiness and it is able to monetise that connect by making available more and more categories of goods.
It’s not just Flipkart. Snapdeal was valued at $1 billion in May. The same month, Flipkart bought online fashion retailer Myntra for reportedly $300 million (about Rs 1,800 crore), about twice that of Pantaloons Fashion & Retail. “The two models (online and offline retail) are strictly not comparable,” says Abneesh Roy, vice-president of Edelweiss Securities, without referring to Myntra or Pantaloons. “They are very dissimilar models and have different valuation basis.” If online retail pivots around growth, offline has more to it, like assets. This gives it less upside than
online, but also lower downside. By comparison, online retailers that come through will receive top valuations. Equally, in the absence of assets, those that don’t make it will be spectacular flameouts.
According to Sanjeev Aggarwal, senior managing director of venture capital fund Helion Venture Partners, the retail landscape is being remapped, because of which brick-and-mortar retailers will never receive the valuations of online
retailers. He draws parallels with what the mobile phone did to landlines -it is still around, but is not growing. “The obituary of physical retail is being written,“ he predicts. “They are fighting a losing battle.“
Cost Equations
The fight for physical retailers is on the cost side.
Growth for physical retailers is linear in nature.
In order to sell to a buyer in, say, Jhansi, they need to set up a store there, and hire staff and incur overheads. By comparison, an online retailer like Flipkart is servicing virtually every pin code in the country from its six warehouses.
Hence, for online retailers, growth is less linear.
It can even be close to non-linear for those who follow a marketplace model, where they don't stock goods but only act as an online platform for other sellers. “As online retailers scale up, their profitability improves. But for brick-and-mortar players, every expansion is a hit on profitability,“ says Bijou Kurien former chief executive of the lifestyle division of Reliance Retail.
Future Group has about 35,000 people on its rolls and Shoppers Stop 16,000. By comparison, Flipkart has 13,000 and Snapdeal 1,600 (of which, 1,000 are engineers). “In the last one year, my headcount has grown by 10%, while sales have increased 600%,“ says Kunal Bahl, co-founder of Snapdeal, a large online marketplace.
More than people, it is real estate that is killing physical retail. According to Technopak Retail Report 2014, brick-and-mortar rentals in India average 15% of turnover, against 8% in international markets. “The physical retail model is weighed down by inventory and high rental costs,“ says Roy of Edelweiss. “There is no inventory or rental costs in an online model, and it therefore tends to fetch higher valuations. PE valuations are based on profitability growth three to four years down the line.“
With the advent of smartphones and mobile Internet, Indians are logging in on some scale -and shopping. In the last two years, India's Internet user base has jumped from 120 million to 200 million. PwC estimates it at 400 million by end-2015.
“Online has a penetration of 0.2% in the country's retail pie,“ says Saurabh Srivastava, director, PwC. “It has lot more headroom for growth.“
Offline Comes Online
Even physical retailers are eyeing the online space. It is also fast becoming a compulsion for them. Growth in the physical space is about 20% a year, but there are barriers. And if online keeps chipping away, they might as well pocket that growth themselves.
In the US, Walmart’s online business posted revenues of $10 billion in 2013 and it’s growing at 30%, against the company’s overall growth of about 2%.
Most physical retailers in India -including Future Group, Tata Croma, Reliance Retail and Aditya Birla Group -either have something in online or are shaping plans. “When brick-and-mortars combine their e-commerce strategy, the opportunities will be far more than pure-play online retailers,” says Kishore Biyani, CEO of Future Group.
Future Group has opened one online f lank in Big Bazaar Direct, which reaches 40 cities, many of which do not have a Big Bazaar outlet.
The group plans to unveil, what Biyani calls, its “omni-channel strategy” later this year. “It will be a force multiplier,” he says. Roy of Edelweiss does not share that reading for physical retailers in general. “They tend to see it (online) as an add-on, as something that drives traffic,” he says. “They are not too serious about it.” According to Pragya Singh of Technopak, a consultancy, an omni-channel strategy can help
physical retailers expand reach, but they also run the risk of cannibalising their own sales.
“Offering discounts for online purchases will be a challenge,” says Singh, leader, retail & consumer. “That will get the clicks but take away the footfalls.” Electronics retailer Croma added an online platform to its 100-odd stores a year back. But the prices there are not lower. Ajit Joshi, CEO & MD of Infiniti Retail, which owns the Croma brand, feels there is room for both online and physical players to grow. He cites the example of Dixons and Best Buy, which continue to be large offline electronic retailers in the US. “In developed markets, penetration of online is not more than 10%.” He adds.
Biyani sees consumer habits marking territories for online and offline retail. “Any product that can be identified by a model number (like smartphones and electronics) will be sold online,” he says. “For others (clothes and groceries), people are more likely to go to shops.” Online, however, has the momentum. Srivastava of PwC, who was the head of supply chain at Flipkart till a month ago, believes risks for brickand-mortar retailers are higher. For example, physical retail has four to five layers between the manufacturer and the buyer. Each has to be serviced and each receives a cut. For an online retailer, there’s only the manufacturer and the buyer. Adds Aggarwal of Helion: “A 24-year-old today is more likely to shop and pay bills online than go to malls or stand in queues.”




India budget 2014: new beginnings and new direction

INDIRECT TAX TRANSFER: SOME RELIEF? DIRECT OR INDIRECT?
In spite of this Budget being generally in sync with the Finance Minister’s commitment to “provide a stable and predictable taxation regime that would be investor friendly and spur growth”, the Finance Bill, 2014 (Bill) provides little relief in respect of the real elephant in the room i.e. the retrospective indirect transfer tax provisions. To rewind to the origins of the provisions, Indian revenue authorities initiated high profile litigation against Vodafone International Holdings BV (Vodafone) in relation to the purchase by Vodafone of an offshore company which indirectly held assets in India. Claims were initiated on the basis that Vodafone had failed to withhold Indian taxes on payments made to selling entity, Hutchison Telecommunications International Limited and the matter was litigated up to the Supreme Court of India, which ruled in favour of Vodafone. The Supreme Court held, inter alia, that there was no Indian tax chargeable in respect of a transfer of offshore assets between the two non-residents. Shortly after the judgment was delivered by the Supreme Court, the Government introduced these provisions which became retroactively applicable.
The constitutional validity of these amendments is currently under challenge in more than one High Court, on account of important issues such as the applicability of indirect transfer provisions to listed companies, issues on the attribution of value, adjustment of cost of acquisition, territorial nexus etc. An expert committee was also set up under the leadership of Dr. Shome, which made several recommendations which are yet to find their way into the law.
Since their introduction in 2012, with retroactive applicability from 1961, the provisions have single-handedly been responsible for significant deterioration in investor sentiment. They have also plagued cross-border M&A and restructuring-related activity on account of their widely worded and ambiguous scope. Considering the ruling Government’s public statements on “tax terrorism” during its election campaign, it was expected that some relief would be provided on this account in the Budget. However, aside from some lip service to the issue, stating that retrospective amendments would be used sparingly, no other changes have been made in the Bill. The Budget speech has indicated that existing litigations will be carried through to their logical end. However, the Finance Minister has indicated that transactions which would come under the purview of these provisions henceforth will be scrutinized by a High Level Committee which will be set up by the CBDT before any action is initiated in such cases, and it is expected that official communication may be released on this issue in the near future. The Finance Minister has clarified (in a post-Budget interview) that assessing officers will not issue notices in relation to these provisions and in case a notice has been issued, the taxpayer can approach the CBDT for relief. It would also need to be seen that if a differential approach is adopted for existing litigations and for new transactions that come within the purview of tax authorities, whether such differential treatment can withstand a constitutional challenge on the right to equality.
NEW TAX REGIME FOR REITS: PASS THROUGH BUT ONLY PARTIAL!
With a view to incentivizing the Indian real estate market, SEBI released the draft SEBI (Real Estate Investment Trusts) Regulations, 2013 on October 10, 2013 following which the framework for listed REITS has been put in place in India. REITs would serve as an asset-backed investment mechanism where an Indian trust is set up for the holding of real estate assets as investments, either directly or through an Indian company set up as a Special Purpose Vehicle (SPV). Please click here for our article where we previously discussed further details on this measure. However, till date, there was no clarity on the proposed tax regime, which is a key element for enabling a successful REIT regime.
The Bill proposes to add several amendments to the Income Tax Act (ITA) to clarify the income tax treatment of REITs and infrastructure investment trusts (collectively referred to as REITs in this piece). These provisions have been incorporated depending on the stream of income that the REIT is earning and distributing:
  1. Income in the nature of interest
The Bill provides for a pass through treatment in respect of any interest income that is received by the REIT from an SPV. This will result in the REIT not being subject to any tax in respect of such interest income, whereas the investors will be subject to tax on the same. However, there would be a levy of withholding tax that would be imposed on distribution by the REIT to its unit holder. This withholding tax would be at the rate of 10% if paid to resident unit holders and 5% if paid to non-resident unit holders.1In case of non-resident unit holders, the 5% tax would be the final tax payable by the non-resident, while in case of residents, they will be subject to tax as per the tax rate applicable to them. The pass-through treatment, along with the low rate of withholding tax for non-residents, will benefit non-residents to take exposure to REITs in India.
  1. Income in the nature of dividend
Where dividends are distributed by the SPV to the REIT, the existing provision dealing with Dividend Distribution Tax (“DDT”) under Section 115-O of the ITA would apply and the SPV would face a 15% tax on distribution with no further liability on the REIT as a shareholder. Further, the Bill proposes that any income distributed by the REIT to its unit holder that is not in the nature of interest or capital gains is exempt from income tax. Therefore, distributions of dividends received from the SPV by the REIT to the unit holders would be exempt from tax in India.
  1. Income in the nature of capital gains
Where the REIT earns income by way of capital gains by sale of shares of the SPV or by sale of the real estate assets held by it, the REIT would be taxed as per regular rates for capital gains under Section 112 i.e. 20% for long term capital gains (LTCG) and slab rates for short term capital gains (STCG). However, further distribution of such gains by the REIT to the unit holder is proposed to be exempt from tax liability. Separately, where a unit holder disposes of units of a REIT, LTCG (units held for more than 36 months) would be exempt from tax and STCG would be taxed at 15% since units would be treated as listed securities under the ITA.
  1. Income in the nature of business profits/lease rentals/management fee
Chapter XII-FA is proposed to be added to the ITA by which Section 115UA is to be included for dealing with the taxation of income earned by a REIT that is not in the nature of capital gains or interest income. All such income is proposed to be taxed in the hands of the REIT at the maximum marginal rate i.e. 30%. This would apply in a situation where the REIT is holding the assets directly or in situations where they are charging fees to the SPV. Such income, while distributed by the REIT to the unit holders would be exempt in the hands of the unit holders.
  1. Tax treatment of the sponsor
The Bill proposes to make the transfer of shares of the SPV into a REIT in exchange for issue of units of the REIT to the transferor (or the sponsor) exempt from capital gains tax under the ITA. However, although the units of a REIT would be listed on a recognized stock exchange, specific amendments are proposed to exclude units of REITs from the exemption of tax on LTCG and the reduced rate of 15% for STCG, if sold by the sponsor. Therefore, rates of 20% for LTCG and slab rates for STCG would be applicable for sale of units of REITs by the sponsor.
Moreover, amendments are proposed to exclude units of a REIT from the beneficial holding period of 12 months as well for LTCG to apply and a holding period of 36 months is proposed. However, it is proposed that the cost of acquisition of the shares of the SPV by the sponsor shall be deemed to be the cost of acquisition of the units of the REIT in his hands.
In addition to the above, the Bill has also proposed that Securities Transaction Tax is to be payable for listing of units of a REIT.
Although the SEBI regulations dealing with REITs allow them to hold real estate assets either directly or through an SPV, the tax benefit for a sponsor to set up a REIT has been extended only to cases where real estate assets are held by the REIT through an SPV. This creates an issue where a sponsor wants to transfer the assets directly into the REIT and not transfer of shares by the sponsor. While, an argument can be taken that such transfer should be subject to tax under the trust taxation regime, the industry was expecting that a specific provision would be provide to enable such transfers without any tax incidence. This can be a substantial dampener for investors looking to set up REITs to invest in the Indian real estate industry or to hold existing investments in India through REITs since the option of holding real estate assets directly through a REIT may involve a tax leakage. Further, the tax pass through available in respect of interest income can become limited use if the REIT can only acquire shares from sponsor's and not acquire assets without a tax incidence for the sponsor. An additional issue that is outstanding is in cases where assets are held in a LLP and on the tax treatment in order to transfer the partnership interest to the REIT.
Although the REIT regime is a step forward in establishing an investment friendly regime, it is hoped that the Finance Ministry would address the above issues going forward and possibly simply the REIT taxation regime. It should be noted that almost all countries provide for a complete pass through regime for REITs if the prescribed regulatory criteria is met and a move towards that will further increase interest in this space.
LIBERALIZATION OF FDI: CHEERS FOR INSURANCE, DEFENSE & REAL ESTATE; BABY STEPS FOR RETAIL?
Leading up to the elections, the stance of the current government has been in support of foreign direct investment in sectors where growth and investment is required. The sole sector where reservations were expressed has been in multi-brand retail. Although no comments have been made in this regard, the Finance Minister made specific reference to boosting the India growth story, and from that perspective has proposed liberalization to the defense, insurance, real estate and manufacturing-retailing industries.
The Finance Minister noted the need to, (a) reduce dependency on foreign defense equipment; and (b) incentivize the nascent defense manufacturing industry in India. Towards this end, the Finance Minister has proposed to liberalize the sectoral cap on foreign investment in the defense sector. Previously, foreign investment in the defense sector was allowed up to 26% under the government route (i.e. with the approval of the Foreign Investment Promotion Board). For investment higher than 26%, specific approval of the Cabinet Committee on Security had to be sought which approval would be provided on a case by case basis in cases where it was “likely to result in access to modern and ‘state-of-art’ technology in the country”. The above mentioned limit of 26% is now sought to be been raised to 49% under the government route subject to full Indian management and control. Currently the FDI Policy prohibits portfolio investment by FIIs / FPIs in the defense sector. The Finance Minister while increasing the composite cap of foreign exchange from 26% to 49% has not clarified whether this prohibition will continue. For an economy that ranks in the top ten in terms of defense expenditure, the market for defense manufacturing (especially domestically) should be ripe. Institutional investors provide precisely the kind of capital the government would want to encourage i.e. pure economic interest with no expectations on control. It is therefore, hoped that in the fine print, this restriction will be removed.
A similar liberalization has also been proposed for the insurance sector which the Finance Minister has noted is “investment starved.” Currently, foreign investment in the insurance industry stands at 26% under the automatic route. It is now proposed to be allowed up to 49% under the government route, subject to Indian management and control. Although not expressly stated, it can be assumed reasonably that investment up to 26% will continue to be under the automatic route, and from 26% till 49% will require the specific approval of the Foreign Investment Promotion Board. This investment cap is likely to include investment by non-resident Indians and FII / FPI. The insurance sector in India was first opened up over a decade ago, since then more than INR 300 billion have been infused into the industry. Yet, insurance coverage in India is in single digits. Given the burgeoning middle class story and a market for expansion, an increased sectoral cap may just be what the insurance sector (wants and) needs.
What would be important to keep an eye on is the references to “Indian management and control” stated against both the defense and the insurance sector reforms. It is likely that management and control will be tested under the parameters set out by the Reserve Bank of India late last year. The definition of control was revised by the Reserve Bank of India last year2 wherein it had also moved towards the definition promulgated and accepted by the Securities and Exchange Board of India. By including the concept of ‘Indian management and control’, there is an emphasis on the definition of control which was introduced to ‘include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements’. Hence, it would be interesting to see how the negative veto rights, etc. are perceived in these sensitive sectors. Therefore, it is important to note that control would mean: (a) effective control; and (b) will be a substance based test that will be determined by the facts and circumstances. The fine print in this regard would be important to understand the scope of this requirement.
Giving another edge to the Prime Minister’s vision of ‘one hundred Smart Cities’, the Finance Minister proposed key reforms to foreign investment in the real estate and development sector. Previously, in order to qualify for foreign direct investment (FDI), the project size had to be a minimum of 50,000 square metres and at least USD 10 million had to be infused for a wholly owned subsidiary. This was a major challenge since in Tier I cities which formed a bulk of the demand demography, finding such a large project was difficult, whereas in Tier II and III cities where such projects were available, the demand was not sufficient enough to warrant investor interest. Through this Budget, the Finance Minister proposes to reduce the requirement of 50,000 square metres to 20,000 square metres, and the capitalization requirement (for a wholly owned subsidiary) from USD 10 million to USD 5 million respectively. This has partially addressed the long standing demand of the industry, which was expecting a reduction to 10,000 square metres, since even 20,000 square metres could be difficult for some Tier I cities (ex –Mumbai). However, this relaxation should provide impetus in development of smart cities providing habitation for the neo-middle class, as is contemplated in the Budget.
In addition, to further encourage this segment, projects which commit at least 30% of the total project cost for low cost affordable housing will be exempted from minimum built-up area and capitalisation requirements under FDI. This could provide a major fillip to affordable housing projects where the size of the project is less than 20,000 square metres. Also, though the provision is yet to be introduced, the proposition of the Finance Minister to include slum development in the statutory list of corporate social responsibility activities is encouraging.
The Finance Minister has also stated in his speech that retail sale by manufacturing units including sale via electronic platform (i.e. e-commerce) would also be allowed under the automatic route. There always seemed to be a disconnect between the intention of the regulator with respect to its views on FDI in manufacturing and FDI in retail (single-brand and multi-brand) / e-commerce. Although the Finance Minister does not seem to have opened up the e-commerce sector to foreign participation, emphatically permitting manufacturing companies having FDI to use the electronic platform for retail sales will provide great relief to such entities who have otherwise had to depend on other sources to sell their products online.
FINANCIAL SECTOR REFORMS: STREAMLINING AND EASING NORMS
The budget has laid emphasis on the banking and financial services sector through channelizing resources to key policy focus areas as well as concentrating on improving the fundamental ecosystem for the sector.
  1. PSU banks likely to get more retail investments and see consolidation
Public sector banks in India have most of their shareholding held by the Government with minimal retail / institutional participation. Also, in order to meet the higher capital requirement that the Basel III norms prescribe, there is an eminent need to increase the capital base of PSU banks. Recognizing this need, the budget has recommended that additional capital can be brought in by tapping domestic retail investors, thereby increasing their stake in PSU banks. However, it was highlighted that majority Government ownership of these banks would be preserved though some extent of greater autonomy with accountability will be considered.
Additionally, the Government is in-principle considering proposals for consolidation of PSU banks. Such M&A activity should provide for efficient utilization of resources through improved economies of scale. However, the impact on consumer welfare would need to be carefully managed.
  1. FSLRC initiatives and banking sector measures
Appreciating the initiatives of the Financial Services Legislative Reforms Commission (FSLRC), the Budget promises to expeditiously take the same forward. Some key measures proposed by the Budget include:
  • amending licensing norms to provide for new private banks on an ongoing basis rather than the current structure where licenses are granted selectively every couple of years. It is also proposed to bring in a separate licensing regime for small and differentiated banks serving targeted interests.
  • introduction of uniform know-your-customer (KYC) norms and usability of records across the financial sector. This positive step should streamline procedural formalities and reduce processing timelines and costs.
  • encouraging long term lending to the infrastructure sector - owing to the prevalent state of the infrastructure industry and the extremely high rate of credit defaults, banks to a great extent have been shying away from financing infrastructure projects. The Budget proposes to reduce statutory and other liquidity requirements that banks would need to maintain whilst extending credit to this sector. Though this is a much needed reform, its implementation will need to carefully tread systemic risk concerns.
  • setting up of 6 new debt recovery tribunals in Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri and Hyderabad. This step is likely to improve the immense lag in recovery suits which in turn should free up resources and ultimately improve the availability of credit.
CAPITAL MARKET REFORMS: REFORMING THE IDR AND ADR FRAMEWORK
With the objective of furthering the development of Indian capital markets, the Finance Minister has stressed on developing a vibrant corporate bond market, currency derivatives market and depository market in India by eliminating unnecessary restrictions in the existing frame work.
  1. Revamping the Indian Depositary Receipts (IDR) Regime
Since the introduction of the IDR Regime, India has only witnessed one IDR listing. The IDR Regime was expected to facilitate capital raising by foreign investors from the domestic market in India, and at the same time provide domestic investors an opportunity to make investments in securities of well-recognized multinational companies listed on developed markets. However the existing regime is fraught with shortcomings such as:
  1. Limited two way fungibility: Initially the regulations for IDRs did not allow holders of underlying equity shares to convert such equity shares into IDRs. However, redemption of an IDR into underlying equity shares was permissible subject to the fulfillment of certain conditions. As an impetus for the issuance of IDRs, SEBI and RBI in August 2012 provided for a limited two-way fungibility. Despite this change, Indian stock exchanges have not seen a foreign company seeking to list its IDRs.
  2. Uncertainty on taxation: At present tax implications at the time of redemption of IDRs into underlying equity shares are not provided under the ITA. Accordingly, any gains arising on redemptions of IDRs into the underlying equity shares, if not specifically exempt under the IT Act, would lead to the situation of the holder being subjected to tax in the absence of any realized gains, and hence making a redemption unattractive
The Finance Minister proposes to introduce a much more liberal and ambitious Bharat Depository Receipt which will hopefully overcome the shortcomings and achieve the desired objective of the increasing the exposure of foreign companies to Indian capital markets.
  1. Expanding the ADR/GDR framework
At present, the depository receipts can be issued only against equity shares as underlying securities. The Finance Minister has proposed to allow issuance of depository receipts with all permissible securities as underlying securities. This is a welcome acknowledgement of the recommendations of the Report of the Committee to Review the FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 provided under the chairmanship of Shri M. S. Sahoo in November 2013. With this proposal expected to take effect though necessary legislations in the coming days, issuance of depository receipts against any underlying securities i.e. equity or debt; by any issuer, listed or unlisted, may be permissible.
  1. Dampener for Mutual funds
Presently, for the units of mutual funds (other than equity oriented funds), the capital gains arising on transfer of units that are held for more than a year are taxed at a concessional rate of 10%. The Finance Bill seeks to increase the rate of tax on long term capital gains to 20% on transfer of units of such funds. Further the period of holding required to avail such long term capital gain has been increased from 12 months to 36 months for this purpose. The enhanced tax leakage will act as a dampener for the debt oriented Indian mutual fund industry in general and for Indian corporates in particular who park surplus cash in such funds. A short term holding for treasury operations may become less tax-efficient for them.
INCREASE OF HOLDING PERIOD FOR UNLISTED SHARES ON CAPITAL GAINS: NEGATIVE IMPACT FOR PRIVATE EQUITY AND M&A
‘Capital gains’ are classified as LTCG and STCG depending on the period for which the transferred asset was held by the transferor till the date of transfer (Holding Period). Accordingly, higher tax rates are also applicable to STCG. While the Holding Period applicable for LTCG is 36 months for all assets, an exception was drawn out under the ITA for shares of any company and other listed securities where the Holding Period applicable was 12 months.
The Bill, however, proposes to amend the definition of STCG to restrict the beneficial holding period of 12 months only to listed securities, thereby excluding unlisted shares (whether of a public limited company or a private company) from this benefit. This move would adversely impact most investors since they have been entitled to beneficial rates of 20% (or in some cases, 10%) for LTCG in India on exits from unlisted companies undertaken after a one year period. Owing to the STCG characterization that would be given to any exit undertaken prior to a 3 year holding of such shares, investors could face a substantially larger tax demand i.e. at progressive rates (between 10%-30%) for Indian/foreign individuals, 30% for Indian/foreign unincorporated entities, 30% for Indian corporate investors and 40% for foreign corporate investors.
Although private equity investors would generally have a longer Holding Period than just 3 years in respect of Indian investments, there may be instances of exit opportunities in a shorter span of time in which case there would be an additional tax burden.
While the Finance Minister has spoken of reviving the economy and promoting investment in his Budget speech, such additional tax burden goes against this spirit and would dampen the investment climate.
CERTAINTY TO FPIS ON CHARACTERIZATION OF INCOME; FINE TUNING STILL NEEDED
The Finance Minister, in his maiden Budget speech has provided much needed clarity on the characterization of income of FPI registered with and investing under the Securities and Exchange Board of India (SEBI) regulations.
Under these amendments, securities held by an FPI will be considered “capital assets”, and gains derived from their transfer will be considered capital gains. As a result of this amendment, gains arising on disposal / transfer of a range of listed securities including shares, debentures and eligible derivative instruments as may have been acquired under applicable laws, shall be taxed as capital gains (and not business income) under Indian domestic law.
The characterization has been a long standing point of contention under Indian tax law – this is because, under Indian tax treaties, the business income of a non-resident is not taxable in India unless the non-resident has a permanent establishment in India. In comparison, capital gains are generally taxable unless the non-resident invests through a favourable treaty jurisdiction such as Mauritius, Singapore or Cyprus. While revenue authorities have tended to treat the income of FII / FPI as capital gains on this account, the position has undergone much litigation in the past.
This move therefore provides certainty to FPIs, and comes as a relief to various categories of FPI investors, such as foreign individuals/companies and other broad-based funds that tend to have brokers and fund managers operating from India. Funds that have been taking the position that such income results in business income may need to re-visit their fund structure due to this development, especially if they are situated in jurisdictions such as the US and the UK which do not contain favourable capital gains provisions in their treaties.
Another issue with this characterisation will be that Indian tax jurisprudence has typically treated derivative transactions as resulting in business income. However, for FPIs, all investments will be considered to result in capital gains, irrespective of whether they are in derivatives. This will limit the ability of the FPI to claim and setoff losses from such investments, and will lead to an anomaly where non-FPI investors may get business income characterization on derivatives while FPIs would get capital gains characterization.
Another important issue will be the issue of treaty eligibility to FPIs and other foreign investors, particularly if their income is characterized as capital gains. With the general anti-avoidance rule looming around the corner, investors are likely to be apprehensive about whether Indian tax authorities will continue to respect treaty benefits to Mauritius and other jurisdictions on the basis of tests laid down in the past.
It was also suggested in the budget speech that, clarity may be provided that fund managers of FPIs who are present in India would not create a permanent establishment (PE) for the offshore funds in India. Management teams for India-focused offshore funds are typically based outside India as an onshore fund manager enhances the risk of the fund being perceived as having a PE in India.3Consequently, the profits of the offshore fund are taxable in India to the extent attributable to the PE. The measure by the Finance Minister is intended at providing an impetus to fund managers to operate from India.
The key anomaly here is that if FPI income is to be characterized as capital gains, it is unclear why the PE exclusion would be of benefit to FPIs. The constitution of a PE only exposes the business income of a non-resident to risk – FPIs who have capital gains would be subject to tax under Indian source rules if the asset transferred is situated in India, absent treaty benefits on capital gains. Also, the budget speech did not, unfortunately, discuss whether an exemption would be extended to the managers of private equity funds who are more likely to require an on ground presence in India in comparison to FPIs.
Another issue will be the exposure due on account of automated trading platforms installed on servers present in India. A particularly interesting case would be hedge funds that rely on co-location servers in Indian exchanges. There could be a case of potential tax exposure in India if the hedge fund trades are based on algorithms running on India based servers. The actual text of the circular covering this aspect would need to be seen to understand the coverage of the safe harbor. While we wait and watch for official communication on this front, it is hoped that these issues will be dealt with as well.
GAAR/ANTI-AVOIDANCE PROVISIONS: LACK OF CLARITY CONTINUES
Owing to the wave of expectation that was generated by the new Government, investors were hoping for a relaxation of the multitude of anti-avoidance provisions, including the General Anti-Avoidance Rules (GAAR) which were added to the Income Tax Act, 1961 in the last 3 years. Moreover, there was also wide speculation in the media as to the deferment of the GAAR by a further 1 or 2 years to promote investment. As it stands today, the GAAR provisions will be effective from April 1, 2015.
The Budget is however silent on the GAAR and neither is there a change in the text of the GAAR provisions nor a positive observation from the Finance Minister on the issue. This is a dampener for foreign investors since it was hoped that the GAAR would either be deferred or rationalized so as to bring it more in line with global standards. Similarly, beneficial changes to several other anti-avoidance provisions such as broad amendments for taxing of capital receipts under Section 56 would have been desirable for promoting India as an investment destination. This is more so as the Finance Minister has stressed on creating an investment friendly climate in his Budget speech. Owing to the importance of this issue, it is hoped that the Government comes out with more guidance on these issues over the course of time.
FOREIGN BORROWINGS: MIXED BAG OF BENEFITS
Section 194LC provides for a lower tax withholding at the rate of 5% on interest payments made by an Indian company to non-residents on foreign currency denominated borrowings by it under a loan agreement (obtained under Foreign Exchange Management (Borrowing or Lending in Foreign exchange) Regulations 2000 or “ECB regulations”) or through the issuance of long-term infrastructure bonds provided that the interest is not more than State Bank of India’s prime lending rate (PLR) plus 500 basis points. However, the provision had a sunset clause till July 1, 2015. The Bill seeks to extend this benefit to cover any borrowings made from July 1, 2012 to July 1, 2017. The Bill also proposes to extend the coverage of section 194LC to any kind of long-term foreign currency bond issued on or after October 1, 2014 but before July 1, 2017.
However, the above benefit has not been extended in respect of any rupee-denominated bond issued to FIIs and FPIs. The Finance Act, 2013 had introduced section 194LD of the Income Tax Act, 1961 which provided for a lower withholding tax of 5% provided that such interest income was payable on or after June 1, 2013 but before June 1, 2015.
Most of the FII / FPI investments in the real estate sector are through subscription/purchase of into listed, rupee-denominated debt instruments issued by Indian companies or non-convertible debentures (NCDs). It was expected that the concessional withholding tax rate would be extended beyond the original sunset period of June 1, 2015. However, the Bill has left section 194LD unchanged. In the absence of such extension, interest payments to FIIs are otherwise subject to a withholding tax rate of 20% subject to benefits that may be available under the provisions of a tax treaty entered into between India and the jurisdiction in which the FII / FPI is resident.
TAX DISPUTE RESOLUTION – ADVANCE RULINGS AND SETTLEMENT PROCESSES TO PROVIDE RELIEF
Tax litigation has become a serious issue in India, with about INR 4 trillion under dispute and litigation before various Courts and Appellate authorities. The increasingly adversarial and fractious relationship between the taxpayer and revenue authorities has been recognized as being problematic, and some efforts have also been made over the last few months by the Tax Administration Reform Committee (TARC) under the leadership of Dr. Shome. The Finance Minister made further proposals to resolve the problem in his Budget speech - while these are yet to find place in the form of a proposal in the Bill, they will be important nevertheless if they are brought into force.
The first proposal is to allow resident taxpayers to file for advance rulings on their tax liability. Presently, under Section 245N of the ITA, only a non-resident; a resident having a transaction with a non-resident; or a notified public sector unit is eligible to apply for an advance ruling on its potential tax liability. Extending this facility to residents would relieve the overburdened Indian courts and also provide much needed certainty to resident taxpayers. Advance Rulings have, except in the recent past, been successful as the Chairman of the Authority for Advance Rulings (AAR) is a retired Supreme Court judge who is able to decide upon complex and emerging issues of taxation on which there is limited precedent, in an expeditious manner.
The standard assessment proceedings and appellate processes tend to take several years and are expensive, aside from requiring the taxpayer to deposit a certain portion of the tax to go on appeal. This is often not feasible for all taxpayers, and resident taxpayers are likely to benefit from the flexibility and certainty, particularly once the General Anti-Avoidance Rules become effective starting April 1, 2016.
The second proposal deals with the practical issue of a backlog at the AAR over the last few years. While the AAR is under a statutory obligation to pronounce a ruling within six months of the filing of an AAR application, some applications before the AAR have been pending for up to two-three years. This defeats the purpose of this system which was intended to be a speedy and efficient mechanism for ensuring tax certainty. Recognizing this problem, the Finance Minister has proposed the constitution of additional AAR benches, which will provide much relief.
Another significant proposal that the Finance Minister touched upon in his speech, but which did not find any mention in the Finance Bill is the enlargement of the scope of the Settlement Commission. Recommendations to this effect were reflected even in the first report of the TARC which was submitted to the Finance Minister in June. This mechanism is intended to make the settlement of tax disputes a more collaborative process aimed at strengthening taxpayer confidence in the revenue system as opposed to an adversarial one where the revenue authorities look at applying coercive measures to ensure compliance by the taxpayer.
This mechanism permits the referral of any assessment or reassessment proceedings or appeal or revision from the same (filed within the limitation period), which may be pending before any revenue authority, for settlement through this alternative dispute resolution (ADR) mechanism. However, it requires the taxpayer to disclose income that has not been disclosed to the tax department and mandatorily pay the full amount of tax and interest on such additional income before filing the application.
While out-of-court settlement of tax disputes is still in its nascent stage in India and there has been limited comment on this issue by the Finance Minister, other jurisdictions such as UK and Australia have been quite successful in implementing ADR in tax disputes; and we may have lessons to learn from them. The HMRC, for instance, has adopted a risk based approach in pursuing tax avoidance. So where there is a higher chance of a successful outcome for the HMRC, it will not seek to settle the dispute out of court for less than 100% of the tax.4 But “low risk” companies have been promised a “light touch”. By pursuing a risk based approach as opposed to targeting industries or jurisdictions, it has been able to target tax avoidance, while at the same time improving its relationship with large businesses and not pursuing frivolous litigation.
Measures such as suspending all or parts of the penalties pending against taxpayers, where “careless errors” have been made by the taxpayers, on the condition that they comply with the conditions imposed by the HMRC points towards a system that encourages behavioural change and long term investment in improving accountability and compliance with the law as opposed to mere revenue generation5. Introduction of similar measures in respect of the Settlement Commission would be welcome.
RESOLVING TRANSFER PRICING DISPUTES: SOME MORE PROGRESS
India has been overwhelmed by a large number of transfer pricing (TP) disputes over the last few years, with around 3,200 transactions taken for TP audits in 2012-13 alone and an aggregate adjustment of around INR 700 billion made. These cases have strained the resources of taxpayers, the tax administration and courts alike, and efforts have been on to introduce some degree of certainty into what is admittedly a very subjective space.
This process began in 2012 with the introduction of an Advance Pricing Agreement (APA) scheme, which allowed taxpayers and the revenue to enter into pricing arrangements relating to specified transactions. The scope of an APA could include specifying transactions covered by it, the agreed TP calculation methodology, a determined arm’s length price (ALP) and assumptions which must be true for the APA to remain binding.
In this year’s Budget speech, the Finance Minister stated that the APA authorities would be provided with additional resources to expeditiously clear APA applications (and possibly take on more applications). A ‘roll-back’ provision is also proposed, so that the price determined by an APA can be applied to international transactions undertaken by a tax payer in the previous four tax years from the date of the APA. This would allow assesses to not only avoid future disputes over transfer pricing but also provide clarity on past disputes, which would reduce some litigation.
Two important changes are proposed on the methodology for determining an appropriate price. While these were suggested by the Finance Minister in his speech and are yet to form part of the law, they would provide much relief to taxpayers if introduced. The first measure is to allow multiple year data for determining the arm’s length price – this will be very important, particularly to taxpayers who may have difficulty finding appropriate comparables in the same year or where sudden changes in market conditions have caused significant or atypical price variations. The second measure has been to allow for a range concept for determining arm’s length price. Currently Indian tax laws compute arm’s length on the basis of an arithmetic mean, whereas the OECD standard is to use an arm’s length range of prices, which allows more flexibility. For instance, an inter-quartile range could be helpful in periods during which there are fluctuating economic and market conditions. This measure is also much appreciated and will go a long way in clearing out TP related litigation.
A third substantive provision, has been that the existing TP provisions apply to certain ‘international transactions’ between associated enterprises (AEs), and in certain cases, between unrelated third parties. The requirement in all instances is that at least one of the AEs has to be a non-resident under Indian tax law. In cases where an unrelated party has a prior agreement with an AE of an enterprise in relation to a transaction between the unrelated party and the enterprise, this third party may be deemed to be an AE of the enterprise. The Bill proposes to amend Indian tax law to clarify that such a third party (deemed AE) could be either a resident or non-resident of India. This has an impact on transactions where an Indian entity is acting as a ‘warehousing entity’ or is entering into an arrangement at the behest of the AE’s. This will work towards plugging some anomalies in the scope of the TP provisions.
FOREIGN DIVIDENDS: INCENTIVE TO BRING BACK FUNDS CONTINUED IN PERPETUITY!
The Finance Act, 2011 had introduced a lower rate of 15% tax in respect of dividends received from outbound investments by domestic companies (where more than 26% of equity share capital is held by the domestic company). This benefit was available for financial year 2011-12 and was extended for one more year. The Bill proposes to extend this benefit indefinitely. This proposal aims to bring about long term certainty in this respect and will incentivize companies to repatriate funds into India, especially for those who have made successful investments outside of India and want to bring back capital into India for investment purposes.




India: FDI In B2C E-Retail

Last Updated: 4 July 2014
Article by Atreyee Sarkar

Introduction

The last decade in India has seen a steady rise in e-commerce (e-retail, e-travel and e-classifieds) due to significant increase in the number of internet users, proliferation of internet-enabled devices, rising disposable incomes, and growing acceptability of online payments.1 Goods or services can be ordered electronically but their payment does not necessarily have to be conducted online. The cash-on-delivery system is one of the biggest reasons for the growth of e-commerce in India. More than 50 per cent of all online transactions in India are believed to be based on the cash-on-delivery payment system.2
The remarkable growth of the e-commerce industry confirms that Indians are increasingly willing to buy goods and services online, and this has given a strong fillip to foreign investment. Foreign venture capitalists and private equity firms have demonstrated their faith in the Indian e-commerce industry and this is evident from the momentous increase in the total investments (US $800 million in 2011 as against US $110 million in 2010).3 The size of India's e-commerce market in 2013 was around $13 billion, according to a joint report of KPMG and Internet and Mobile Association of India ("IAMAI").4
Despite its burgeoning growth, the e-commerce market is not without hurdles. Apart from the problems of logistics, bottlenecks in transport, drop-outs on payment gateways and an intensely competitive environment, an added recent concern is the alleged violation of foreign investment laws by e-retail companies in India. This newsletter provides a brief overview of the current government policy on foreign direct investment ("FDI") in business-to-business ("B2B") and business-to-consumer ("B2C") e-retail, the alleged violation of FDI norms by online retail companies and the pros and cons of FDI in B2C e-retail.

1. Extant FDI policy on B2B and B2C e-retail in India

India's FDI policy permits FDI up to 100% in e-commerce activities, but this is dependent on a very crucial stipulation– the policy applies only to companies engaged in B2B e-commerce, and not to those in retail trading.5 It is at this point that classification of online retail businesses into B2B and B2C e-retail becomes significant.
In B2B e-retail, trading is between business entities such as manufacturers and wholesalers or between wholesalers and retailers. India permits 100% FDI in B2B e-commerce under the automatic route.6 In B2C e-retail, online businesses sell directly to the consumers. The FDI policy provides that retail trading, in any form, by means of e-commerce, would not be permissible for companies with FDI and engaged in the activity of single brand retail trading or multi-brand retail trading. Therefore, it is clear that the extant FDI policy does not permit FDI in B2C e-commerce.7
This restriction on foreign investment in B2C e-retail has forced many online business entities with foreign investment to adopt the marketplace model. In this model, the online company runs a website which provides the marketplace— a platform for business transactions between buyers and sellers. In return for the services provided, the online company earns commission from the sellers.8 In this model, ownership of inventory vests with the enterprises (also the ultimate sellers) which advertise their products on the online company's website.9 Thus, the marketplace model is compliant with the FDI policy of India as the online business entity providing the marketplace does not involve itself in any retail transaction or any direct sale to the consumer.
The marketplace model translates into smaller margins, and less control over quality of service, product description, and speed of delivery. Amazon.com, Inc. has been forced to adopt a marketplace model in India to comply with FDI regulations, whereas in the United States it follows a hybrid marketplace model. An inability to adopt inventory models, or to experiment with mixes of inventory and marketplace models makes it difficult for retailers to make innovations and expand their range of offerings.

2. Flipkart's alleged violation of the FDI policy

Since November 2013, Flipkart, one of India's largest online retail businesses, has been under investigation by the Enforcement Directorate ("ED")10 for alleged violation of FDI regulations. Violation of FDI regulations is covered by the penal provisions of the Foreign Exchange Management Act, 1999. Tracing the events of the past couple of years will clarify why Flipkart is under the scanner of the ED.
Flipkart was incorporated in 2008, and was operating on an inventory-based B2C model. In August 2012, Flipkart raised $150 million in its fourth round of funding from MIH (part of Naspers Group) and Iconiq Capital. Flipkart's global investors include Accel Partners, Tiger Global, Naspers and Iconiq Capital. The foreign investment policy meant that an online retailer like Flipkart could not have FDI in its B2C entity, unless it shifted to a B2B marketplace model. Flipkart shifted to a B2B marketplace model only in April 2013 to ensure compliance with the FDI norms in e-retail. The investigation by the ED pertains to the capital that Flipkart raised before converting into a marketplace model. It appears that Flipkart was operating on a B2C e-commerce model where they owned the complete inventory even while having received FDI worth nearly $180 million till September 2012. Some other online retailers such as Myntra, Snapdeal, Yebhi, Jabong, and Fashionandyou are also being investigated by the ED on similar grounds. The ED has the power to impose a fine up to three times the actual investment allegedly made in violation of FDI laws.
Flipkart's marketplace model has also come under the ED probe for not complying with the spirit of FDI regulations. Flipkart has created a complex business structure by integrating its B2B operations with the marketplace model. A company called WS Retail was incorporated in 2009, which transacts with the customers and allegedly acts as a ‗front' for the B2B firm (Flipkart Online Services) which receives foreign investment. This structure has been allegedly adopted to keep the foreign-funded Flipkart Online Services at an ‗arm's length' from selling directly to the consumer. While this structure seems to comply with the FDI policy in letter, for this structure to comply with the FDI regulations in spirit, Flipkart must establish that it has no influence over WS Retail, and that WS Retail maintains an arm's length relationship with Flipkart Online Services.

3. Evolving government policy towards foreign investment in B2C e-retail

In September 2012, the Indian government allowed 51% FDI in multi-brand retail, subject to certain conditions. This announcement was commended by e-commerce companies, since it was hoped that it would also draw in foreign investments in B2C e-commerce. However the Department of Industrial Policy and Promotion ("DIPP") of the Ministry of Commerce and Industry later clarified that this mandate did not apply to B2C e-retail and would apply only to retailers with brick-and-mortar operations. One of the reasons alluded to for this was the difficulty in monitoring inter-state transactions in e-commerce activities. Further, the new policy is merely an enabling policy and is dependent on the policies adopted by the respective governments of the States and Union Territories.
In January 2014, the DIPP floated a discussion paper11 detailing the merits and demerits of allowing FDI in the e-retail sector, urging stakeholders to give their comments.
Opponents of FDI in B2C e-retail argue there will be loss of jobs and creation of a monopoly by multinational companies. Allowing the entry of inventory-based large foreign e-retailers like Amazon and e-Bay may shrink Indian entrepreneurship and the Micro, Small and Medium Enterprises ("MSMEs") sector. It is apprehended that organized retailers would source their goods from cheaper markets abroad, which will adversely affect the Indian manufacturing sector. The discussion paper also noted that introducing FDI in B2C e-retail would work against the spirit of FDI policy in multi-brand retail trading.12
The proponents of the pro-FDI view cite benefits like creation of infrastructure, more jobs and better consumer service. The move will reduce the need for middlemen, lower transaction costs, reduce overhead charges, and reduce inventory and labour costs. FDI in B2C e-retail will allow MSMEs and artisans to reach out to customers far beyond their immediate location. Further, the spread of e-commerce in the rural and suburban India will provide choices to the growing number of customers there who have disposable income and are willing to spend for their choices. It will also help the rural economies integrate faster with the national economy. The government's discussion paper observes that e-commerce has the potential to contribute more than 4% to India's GDP by 2020.
A joint report of KPMG and IAMAI titled ―e-Commerce: Rhetoric, Reality and Opportunity‖ has established a direct co-relation between the size of the consumer e-commerce industry and openness to FDI in inventory based e-commerce. The report found that unlike countries such as US, China, Australia, Sri Lanka and Pakistan, India was the only one among a list of developed and developing economies that did not allow FDI in inventory based e-commerce.
A decision by the newly-elected government on the entry of foreign investment in B2C e-retail is expected. As e-retail by its very nature is unlike physical retail, there are several issues which remain unclear for want of government decision on this subject. Would introduction of FDI in B2C e-retail grant back door entry to foreign investors in multi-brand retail? While the State governments were given the choice to consent to establishment of front end multi-brand retail stores within their respective areas, the same treatment is unworkable for e-retail as it is not subject to any geography or territory limitations. Furthermore, will the e-retail companies partner with local manufacturers to source products or will they source their goods from cheaper markets abroad? Will the government permit sale of agricultural produce or processed food by e-retail companies receiving foreign investment? Will the government incorporate necessary safeguards in the policy to protect the interests of various stakeholders such as the brick and mortar shopkeepers and domestic e-retail companies?
It remains to be seen whether India-based e-commerce companies like Flipkart, Snapdeal, Fashionandyou, DealsandYou and HomeShop18 will be able to fight the battle against big international business entities such as Amazon and e-Bay, once the government approves FDI in B2C e-retail and they are permitted to have their own warehouses or retail operations. The recent merger of Flipkart with lifestyle e-commerce portal Myntra, is indicative of how e-retail companies are consolidating themselves to prepare for a competitive future.

Conclusion

At present, e-commerce, as a proportion of total retail sales in India, is a small figure.13 However, the rate of growth in e-commerce from year to year and the impact of such growth on the economy have forced the Indian government to study the FDI policy framework with respect to e-retail. If and when the new government introduces FDI in B2C e-retail, it will be interesting to see the entry routes, FDI caps and limits on the percentage of sourcing from domestic manufacturers. Supportive foreign investment regulations will help in easing capital constraint and building a constructive growth environment for the e-retail industry. The onus is, therefore, on the government to formulate clear e-retail policy so that these issues can be addressed.
Footnotes
1 India, with 205 million internet users, has the third largest internet user-base in the world, behind China with 300 million and the US with 207 million, according to a report released by the Internet and Mobile Association of India (IAMAI) and IMRB International in November 2013.
2 For details please see the IBEF report of January 2013 available at http://www.ibef.org/download/The-Rise-and-Rise-of-E-commerce-in-India.pdf.
3 Supra.
4 As per information available at http://www.iamai.in/PRelease_detail.aspx?nid=3161&NMonth=9&NYear=2013 (last visited on June 6, 2014).
5 Under paragraph 6.2.16.2 of the consolidated FDI policy circular of 2014 (effective from 17 April, 2014), FDI up to 100% is permitted in e-commerce activities, subject to the provisions of Paragraph 6.2.16.2.1, which are set out as- "E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well."
6 FDI in B2B e-commerce was first permitted vide entry at serial number 4 of Press Note 2 (2000) dated 11.02.2000. The provisions on e-commerce, under Press Notes 4 and 5 of 2012 reiterate the existing provisions.
7 See Paragraphs 6.2.16.3 (2)(f) and 6.2.16.5 (1)(ix) of the consolidated FDI policy circular of 2014.
8 For instance, Flipkart only provides a platform for communication and any contract for sale of goods or services is a bipartite contract between the seller and the buyer. For details please visit http://www.flipkart.com/s/terms (as visited on June 21, 2014).
9 In the inventory based model, ownership of goods and services as well as the marketplace vests with the same entity— the company that runs the website.
10 The ED is a part of Ministry of Finance and is responsible for enforcement of the Foreign Exchange Management Act, 1999 and certain provisions under the Prevention of Money Laundering Act, 2002.
11For details please visit: http://dipp.nic.in/English/Discuss_paper/Discussion_paper_ecommerce_07012014.pdf (as visited on June 21, 2014).
12 The DIPP discussion paper noted that "allowing FDI in e-commerce will provide e-commerce players complete geographical reach which will be against the spirit of FDI in MBRT i.e. being restricted to cities with a population of more than one million or any other city as per the choice of consenting states".
13 According to the India Brand Equity Foundation (IBEF) report of January 2013 e-commerce in India accounts for just 0.1 per cent of total retail sales vis-à-vis more than 2.9 per cent in China. The online retail penetration enjoyed by the US is 7.0 per cent.
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