IIM-A study allays government fears on e-commerce FDI

BENGALURU: The government’s circular on foreign domestic investment (FDI) in e-commerce issued last week is expected to significantly constrain companies like Flipkart (now owned by

Walmart

) and Amazon.

Incidentally, before issuing the circular, government think tank NITI Aayog sought a paper of recommendation from IIM-Ahmedabad. The recommendations were almost exactly the opposite of what the government had issued.

The IIM-A paper, which TOI has seen a copy of, nudged the government think tank to actually consider allowing FDI in B2C ecommerce under the inventory model. The paper, submitted by IIM-A director Errol D’Souza, said that contrary to common perception, global players do not have access to unlimited capital for “predation” and that the government should take a lenient view on “pricing influence by marketplaces”.

It said monopoly of a marketplace is not necessarily harmful for the customer, cash burn is not always

capital market

predation, and non-price predation (exclusive arrangements with suppliers) may not be discriminatory.

The recommendations were first given to NITI Aayog in June last year, before the first draft of the e-commerce policy was released by the government. IIM-A then received “minor comments” on the paper from NITI Aayog and re-submitted the paper in October, a spokesperson of IIM-A said over email.

An email sent to NITI Aayog CEO

Amitabh Kant

did not elicit a response while the spokesperson of the government body did not respond to calls and text messages. Reports say the government will come out with a reworked final e-commerce policy in a few weeks.

"A `deep-pocket’ global predator, it is claimed, can resort to in-house sources of fund to finance its predation. However, these internal sources of fund are not free – such funds have alternate uses. The company must keep tabs that there are opportunity costs to deploying these funds. The opportunity cost of the fund will not be very different usually than cost of borrowing or raising money from a clutch of investors," the IIM-A paper said.

It also argued that as long as low prices/ cash burn play the role of expanding the nascent market or building critical mass, they should not be deemed predatory.

"Overall, Press Note 3 (clarifications on FDI in e-comm policy) should take a lenient view of the current condition which states that `marketplace will not directly or indirectly influence sale prices of goods and services and shall maintain a level-playing field’. Ability to influence prices should be allowed, when they are used to build market participation or reach a critical mass," the paper said.

The advantages that vendors owned by the platform have over other suppliers should be deliberated upon in detail, the paper said. The latest government circular has banned marketplaces from having a stake in any of its sellers.

The latest policy can force major players to change their operating models. Homegrown companies are generally backing the government move.

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