Walmart May Exit Flipkart As Tough New FDI Rules Bite: Morgan Stanley

The US-based brokerage firm Morgan Stanley has indicated that retail giant Walmart may exit Flipkart amid the tough changes the Indian government has brought in with the ecommerce Foreign Direct Investment (FDI) rules.

In a February 4 report, the firm said that “an exit is likely, not completely out of the question, with the Indian ecommerce market becoming more complicated”.

On January 31, the freshly renamed Department for Promotion of Industry and Internal Trade (DPIIT), rejected requests by leading ecommerce giants — Flipkart and Amazon — to extend the February 1 deadline for the changes advised in the Press Note 2 of 2018 series on FDI policy in ecommerce.

PN 2 of 2018 primarily targets the following conditions for receiving FDI in ecommerce activities (in the marketplace model):

• 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.

With these changes in effect since February 1, Amazon and Walmart’s have together lost $50 Bn in market capitalisation. Also, the etailers are now required to remove more than one-third of the products from their platform in wake of new rules, specifically from some high selling categories.

For Flipkart, a major impact has been observed on its high-selling electronics category. “We estimate that Flipkart derives 50% of its revenue from this category, meaning Flipkart could face meaningful disruption and top-line pressure in the near term,” said Morgan Stanley.

Walmart, however, has shown optimism for the Indian market given the opportunity present in the ecommerce segment. “As Walmart scales in India, the company will continue to partner to create sustained economic growth across agriculture, food and retail. Future investments will support national initiatives and will bring sustainable benefits to the country,” said a Walmart spokesperson in a media statement.

The ecommerce majors are also looking for alternative routes and are looking to create more subsidiaries to continue with their current business without violating the new rules. However, as a January 2, 2019 article published by Khaitan & Co. on Mondaq mentions,

“Unlike other provisions of PN 2 of 2018, the DIPP has not clarified whether such equity participation is direct or indirect. Therefore, structures, where subsidiaries of an Indian owned and controlled company (also having minority equity participation from a Marketplace Entity or its group companies) carry out e-commerce activities on the platform of such Marketplace Entity, may be workable absent any subsequent clarification from the DIPP or any other competent authority. However, such a view may not be in line with the spirit and intention of the changes sought to be made by PN 2 of 2018.”

Another question that arises here is: Can Walmart exit Flipkart? Well, in November 2017, amid tightening regulation over online data, Amazon had to sell off the hardware from its public cloud business in China. If the similar sell-off happens between Walmart-Flipkart, this will certainly trigger the permanent roll off of Walmart from the Indian market.

[The development was reported by ET.]