IVCA Voices Support For Startups, Demands Roll Back Of New FDI Rules

IVCA Voices Support For Startups, Demands Roll Back Of New FDI Rules


IVCA has submitted its feedback to DPIIT and has also made a representation to the PMO

IVCA claims that new FDI rules will clip wings of Indian startup movement

It also says that these rules will favour big business houses over startups

At a time when the Department for Promotion of Industry and Internal Trade (DPIIT) is looking to finalise the new FDI ecommerce guidelines, the Indian Private Equity and Venture Capital Association (IVCA) has demanded a rollback of Press Note 2 (issued in 2016) and Press Note 3 (issued on December 26, 2018).

With a view to providing clarity to the extant policy and after extensive stakeholder consultations, the guidelines for FDI in ecommerce were issued vide Press Note 3 (2016). To provide further clarity to FDI policy on ecommerce, Press Note 2 (2018) was issued.

While Press Note 3 disallowed one seller from selling more than 25% of the total products on the marketplace on account of creating a level playing field, the Press Note 2 puts checks on:

  • control over inventory by the provider of the marketplace platform
  • equity participation by the provider of the marketplace platform in the sellers that are selling on such platform
  • fair and non-discriminatory dealings by the marketplace platform with such sellers
  • exclusivity arrangements between such platform and sellers

The apex body representing AIFs in India has submitted its feedback to the DPIIT and has also made a representation to the Prime Minister’s Office (PMO).

New FDI Rules Will Clip Wings Of Indian Startups

As claimed by the IVCA, the guidelines prescribed in PN 2 and PN 3 do not apply to ecommerce ventures started by Indian houses that don’t need to raise external capital or have access to local debt.

The Indian startup movement took off in 2008 because international venture capital funds started backing young and talented founders. “These founders could for the first time in Indian history, come up with an idea, put together a high-quality team and work hard to build new and important companies, taking them to great heights because of the capital available,” it said.

The startup movement gave birth to successful startups of the likes of Flipkart, Paytm, Ola, Oyo, Big Basket, Swiggy. It also brought on the table a new class of entrepreneurs in India, wherein earlier, most businesses were started by well-heeled families and big business houses, resulting in a concentration of wealth and power in a few hands.

“Cutting off foreign capital to ecommerce companies clips the wings of the Indian startup movement. These rules will favour big business houses over startups. The Indian startup movement will be severely impacted as the bulk of the funding into it will be cut off,” said the IVCA.

IVCA also claimed that there is no data to support that small traders have been hurt. “Offline retail has been growing at 25% year-on-year for the last 15 years while ecommerce grew separately. Retail has grown from $672B in 2017 to $1.2 Tn in 2020. Therefore, it is unclear who is being protected,” it added.

Walmart, Amazon Suffer Losses Due To New FDI Rules

Reports surfaced earlier this week that with the new ecommerce rules in place from February 1, Amazon and Walmart’s have together lost $50 Bn in market capitalisation. While both the firms are looking for alternative routes, as of now, both Flipkart and Amazon India marketplaces have pulled down around one-third of the products from their platforms.

Analysts expect that this could affect more than 50% of their business, particularly in high-selling categories such as smartphones and electronics.

Also, Morgan Stanley has indicated that Walmart may exit Flipkart if the new rules in FDI are not relaxed, as this will create survival issues for the US giant despite the booming ecommerce opportunity in the country.

So far, the new changes have not been added to the draft ecommerce policy issued in August 2018. The DPIIT is reportedly set to hold a meeting with stakeholders, including those companies and groups that were opposed to the tighter FDI guidelines before finalising the policy.

The IVCA, being an investors’ organisation, was expected to stand up for startups. The government, however, needs to find a middle ground here, as trader bodies such as the CAIT and the AIOVA are also backed by powerful organisations such as Rashtriya Swayamsevak Sangh-affiliate Swadeshi Jagran Manch.

It is worth noting that Walmart and Amazon, which together control over 69% of the Indian ecommerce market, are currently vital for Indian ecommerce as well as for FDI in the Indian startup ecosystem. Their exit will definitely further hit FDI, which in any case has not been encouraging in recent years.

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