FDI boost for the eCommerce market

FDI boost for the eCommerce market

FDI boost for the eCommerce market

ECommerce in India has taken off in a big way in the last few years, all thanks to a rising and aspirational middle class, proliferation of internet to the nooks and corners of the country, and presence of one of the youngest populations in the world.

Flashback to 1995 when internet was just launched in India, the growth in eCommerce during the initial years of the internet was fairly muted. In fact, it took India a decade and a half from 1995 to 2010 to reach the $200 million revenue figure. The real wave of growth can be attributed to the five-year period between 2010 and 2015 when India reached the $8 billion mark in 2015 from $200 million as recorded in 2010. As per a recent revised estimate by global financial services company Morgan Stanley, the Indian eCommerce market is expected to grow the fastest in the world in the next three years to reach $119 billion by 2020.

Add to this the fact that we are also the youngest startup nation in the world today with 72% of startup founders being less than 35 years old, as per a joint report by Nasscom-Zinnov Consulting titled ‘Start-up India – Momentous Rise of the Indian Start-up Ecosystem’. Entrepreneurship is clearly in vogue today with the country becoming the third largest startup nation in the world just behind two of the most developed nations i.e. the US and UK.

The huge potential that exists in the country today when it comes to eCommerce is now being fueled by the efforts of the incumbent government, efforts which are aimed towards making India the preferred investment destination of the world. The recent announcement by the government around allowing 100% FDI in the marketplace format of eCommerce is a welcome step for a business like ours. AskMe Grocery is a fast-growing online grocery business in India and it operates as a pure marketplace player in this segment. With presence in 38 Indian cities, we have aggressive plans to add another 45 by September 2016.

Here is how the move to open up 100% FDI will impact the eCommerce industry in general and marketplace models like ours in particular:

 Business models will have to be restructured: The move to introduce 100% FDI in marketplace formats of eCommerce has also come with some caveats though. The most important being the imposition of a cap in revenues from a single seller to not more than 25% of total revenues. Taking this into account a ‘Course Correction’ becomes the need of the hour for the majority of eCommerce companies operating today. We anticipate restructuring of the existing eCommerce models which are revenue-centric and purely banking upon a handful of large accounts to fill in the coffers.

 Safeguard the interests for SMEs: Access to funding is undoubtedly one of the most difficult aspects of doing business in India. Small and Medium Enterprises (SMEs) are often found wanting for capital even if they have ideas which are disruptive and can create new revenue streams in the industry. Opening up investments from foreign shores is definitely going to bolster the growth of SMEs in the country and make entrepreneurship much more appealing than what it is today.

 Inflated valuations will be a thing of the past: Waiting for the announcement around the next big unicorn in eCommerce? You might now have to wait a tad longer. This is because of the cap in revenues from single accounts and the end of deep discounts. ECommerce business models will have to be re-invented to be in line with these new policy decisions announced by the government.

 Increase competition and further benefit the consumers: The chinks in the armor that exist which are preventing the eCommerce sector from achieving its optimum potential will definitely be addressed because of the opening up of 100% FDI in eCommerce. The entry of established global companies will improve the level of services, introduce new technologies, and foster an environment for innovation in terms of service offerings.

 Ending the era of discounts: Predatory pricing is bound to end as the frenzy around customer acquisition at the cost of the bottom line will go away. ECommerce companies will finally be able to aim for profitability as their focus will shift from customer acquisition to retention.

I definitely see marketplace models of eCommerce being the big gainers in the process. With these new measures in the Indian eCommerce sector, the government has clearly signaled its backing for companies operating in this space who are playing the role of facilitators. The opening up of 100% FDI in eCommerce will see a definite edge for marketplace models in the times to come.

It would create a level playing field for marketplace models in the eCommerce sphere and enable them to compete with deep-pocketed large companies who are thriving via the inventory-led model of eCommerce and by service large accounts.

With on an average three internet users being added every second, internet penetration in India is expected to jump up from 32% in 2015 to 59% in 2020 (as per Morgan Stanley), the environment is ripe for entrepreneurship in India.

New business streams are fast emerging which are catapulting the growth of eCommerce to newer heights. Who would have thought a few years back that a category like online grocery would emerge and will take India consumers by storm? Today, the Indian online grocery market is expected to reach Rs 2.7 billion by FY 2019 (source: Ken Research). So what makes online grocery click?

The sheer variety on offer by an online grocery store is one of the biggest reasons for the popularity of this segment. As per Ken Research, on an average there are 10,000 SKUs available in an online grocery store in comparison to just 1,000 SKUs available through the traditional stores. The government of the day has a major role to play in bolstering the industry. Hope we are able to sustain this momentum and emerge as world leaders in every segment of the thriving eCommerce space.

Bringing clarity

100% FDI under automatic route is permitted in marketplace model of eCommerce. However, keeping in line with the extant position under the FDI Policy, DIPP has specified that FDI is not permitted in the inventory based model of eCommerce

FDI is permitted up to 100% under automatic route in Business to Business (B2B) eCommerce

No FDI is permitted in the Business to Consumer (B2C) eCommerce, except in certain
 circumstances

Although an eCommerce marketplace entity will be permitted to enter into transactions with sellers registered on its platform on Business to Business (B2B) basis, the eCommerce entity providing the marketplace will not exercise ownership over the inventory

An eCommerce entity cannot permit more than 25% of the sale affected through its marketplace, from one vendor or its group companies. As per a recent estimate by Morgan Stanley, the Indian eCommerce market is expected to grow the fastest in the world in the next three years

(The author is the co-founderof online grocery store, AskMe Grocery)

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