Flipkart Circumvents Indias FDI Norms
The Indian government has been defensive about opening up its retail sector to global companies such as Wal-Mart and Amazon. This is the reason why the country only permits 100% foreign direct investment in single-brand retail. This means that companies like Levis or Benetton can own and operate stores because they only sell one single brand. On the other hand, supermarket chains sell multiple brands from the same store. As of now, the Indian government does not allow more than 49% foreign ownership in such ventures.
Amazon and Flipkart: Bending the Rules
Over the past few years, tech giants have used the cover of technology to blur the lines between single and multi-brand retail. Companies like Flipkart and Amazon have been blatantly circumventing the law. In effect, Amazon and Flipkart have been running multi-brand retail stores with majority backing from a foreign financial company. Lets have a closer look at the earlier structure which was being followed by e-commerce companies to understand this further.
The Earlier Structure
Technically, Amazon and Flipkart act like marketplaces. This means that they claim to be companies like eBay which only provide a platform where buyers and sellers meet. It is true that Amazon and Flipkart do allow local retailers to enlist their products on their websites. However, these retailers account for a very small percentage of the total sales.
A large majority of the sales come from pass-through shell vendor companies which have been created by Amazon and Flipkart. For instance, Cloudtail sells a lot of products on Amazon. Technically cloudtail is an independent retail company whose office is registered in India. However, the reality was that Cloudtail was created only to circumvent the rules.
Hence, the wholesale arm of Amazon would directly sell to Cloudtail who would then sell to the Indian consumer. It doesnt take a genius to figure out that the existence of Cloudtail is only an eyewash. In reality, Amazon is directly operating a multi-brand retail store in India by bending the rules.
What Were The New FDI Norms?
After several protests by Indian retailers, the Indian government finally took cognizance of the illegality of this operation. In order to prevent this from happening, the Indian government created a rule that retailers like Cloudtail should not be allowed to buy from companies in which more than 25% of the inventory is controlled by the e-commerce firm itself. Hence, this rule was meant to break the proxy route using which Flipkart and Amazon were breaking the law.
What Was The Intent of these Norms?
The Indian government was of the opinion that new regulations would put an end to the potentially illegal operation that Amazon and Flipkart had been running. The Indian government wanted these e-commerce sites to truly become marketplaces where small and medium sellers can sell their products. If the supply chain of companies like Cloudtail is broken, the smaller buyers will become more competitive. Hence, the Indian government was only trying to look after the interests of its small scale industry.
How Flipkart Is Circumventing These Norms?
However, Flipkart and Amazon have once again used their legal think-tank to find a way to outsmart the Indian government. It turns out that the 25% rule is not enough to stop these companies from bending the rules.
- The rules stipulate that companies like Cloudtail (local proxy sellers for Amazon) must not buy products from companies in which more than 25% of the inventory is controlled by the e-commerce firm.
- Since Amazon wholesale cannot directly sell to Cloudtail, e-commerce companies are planning to enlist the use of another intermediary called the Alpha sellers
- In this arrangement, Amazon or Flipkart will then sell its goods to Alpha sellers. Now, these Alpha sellers already have a business. Hence, Amazon and Flipkart do not control more than 25% of their inventory
- This sale will only be a paper transaction. The so-called alpha retailers will not bear any risk of ownership. They will simply be pass through entries which will receive and send invoices. Since they will not bear any risk companies like Flipkart and Amazon are providing them a fixed return for their co-operation.
- Finally, these companies will sell the same goods to companies like Cloudtail (beta sellers) who will once again sell them to Indian consumers. The entire purpose of this alpha-beta arrangement is to negate the effect of the new regulation which was introduced by the government.
It is difficult to decipher such actions and put a meaning to them. On the one hand, there are critics who believe that these acts amount to breaking the law in spirit and hence must be punished. On the other hand, many believe that Flipkart and Amazon are being innovative and avoiding the unnecessary regulation and red-tape which is coming their way.
However, it is unlikely that the Indian government will take this lying down. Since this is an election year and small traders form a huge chunk of voters, it is likely that the government will crack down on this alpha-beta strategy.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Corporate Finance - Introduction
- Nominal and Real Value of Money
- Fundamental Rules of Corporate Finance
- Present and Future Value of Money
- Net Present Value Calculations
- Compounding Intervals and Interest Rate
- What Are Negative Interest Rates ?
- The Consequences of Negative Interest Rates
- Opportunity Cost of Capital
- Valuing Cash Flows in Different Periods
- What is Perpetuity ?
- Growing Perpetuity
- What is Annuity ?
- Ordinary Annuity vs. Annuity Due
- Types of Annuity Calculations
- What is Bond Valuation ?
- Bond Market Conventions
- How Interest Rates Affect Bonds ?
- Stock Valuation Models
- Discounted Cash Flow Approach
- Assumptions During Stock Valuation
- What is Cost of Equity ?
- What is Payback Period ?
- What is Internal Rate of Return (IRR) ?
- Problems With Using IRR
- Capital Rationing & Profitability Index
- Types of Capital Rationing
- Capital Controls: Meaning, Types, Benefits and Downside
- Estimating Project Cash Flows: Part 1
- Estimating Project Cash Flows: Part 2
- Estimating Project Cash Flows: Part 3
- Capital Budgeting and Inflation
- Capital Budgeting and Depreciation
- Equivalent Annual Costs
- Investing and Financing Decisions
- Getting Creative with Capital Budgeting
- The Fallacy of Creative Destruction
- Companys Risk vs. Project Risk
- How Governments around the World are Bankrupting Future Generations for Present Consumption
- Role of Credit Rating Agencies in Determining Attractiveness of Companies and Countries
- Federal Reserve Announcement to Taper Quantitative Easing
- How Do Funds Transfer Systems Work
- The Importance of KYC (Know Your Customer) Norms and Procedures in Banking
- Difference between Corporate, Retail, Investment Banking, and Private Banking
- Impact of Geography on Banking and its Functions
- Functions of a Central Bank in Modern Economies
- Lease Rental Discounting
- Lending Against Intangible Assets
- Real Reasons behind FDI in Retail in India
- Microfinance: A Cure for Poverty
- Microfinance: Indebting the Poorest in the World
- Behind the Scenes of an Initial Public Offer (IPO)
- Pros and Cons of Going Public
- Snapchat IPO: Is this the New Tech Bubble ?
- Benefits of Delaying Profitability
- Why Do Corporations Get Away With Tax Avoidance ?
- After Effects of the Nirav Modi Scam
- The Panaya Acquisition
- The Flipkart and Wal-Mart Alliance
- The Worlds Largest IPO
- Initial Coin Offerings: A Primer
- The Aftermath of the Qualcomm Deal
- What are Demergers: Its Pros and Cons
- Benefits of a Holding Company
- The Economics of Lawsuits
- Protectionist Sentiment over Flipkart Takeover
- The Impact of Tariffs on the Energy Sector
- Venture Debt A Primer
- Interest Rates and Automobile Sales
- How Should Companies Communicate With Wall Street?
- How an Interest Rate Hike Will Affect the Government of USA
- Is Tesla Close to Bankruptcy?
- Myths Surrounding Toys R Us Bankruptcy
- The Economics of 'Soda Taxes'
- Why Elon Musk's Tesla Should Go Private and Why It Won't?
- Why the Xiaomi IPO Failed?
- How A Whatsapp Message Nearly Took Down A Company
- The Case for Index Funds
- The Sears Bankruptcy
- The Socialization of Losses
- The Sudden Downfall of IL&FS
- Why Healthy Corporate-Regulator Tussle is Good for Free Market Capitalist Economies
- What Happens When Businesses Go Bankrupt? Insolvency, Aftermath, and Recovery
- Alibabas Singles Day
- Ubers New Businesses
- Goldman Sachs and the 1MDB Scandal
- The Amazon Divorce
- Are Index Funds Not A Good Investment In India?
- Can Brick And Mortar Stores Compete With Amazon?
- Why is the Fed Still Raising Interest Rates?
- Problems Related to Facebook, WhatsApp, and Instagram Mega Merger
- The Whatsapp-Facebook-Instagram Merger
- What Is The DHFL Scam?
- Financial Troubles In the Fracking Industry
- Flipkart Circumvents India's FDI Norms
- Subprime Automobile Loans in America
- The Jaguar Land Rover Debacle
- The Kraft - Heinz Fallout
- Why Uber Should Be Regulated?
- Is Regulation of the Tech Sector Long Overdue with the Tech Giants being Too Big
- The Fall of An Ambani Scion
- Litigation Funding: A Primer
- The Finance behind the Plastic Problem
- The MasterCard Visa Duopoly
- Is the Lyft IPO Overpriced?
- The Alliance between Car Companies and Ride Hailing Apps
- The Amazon Divorce Deal
- The Lawsuit Between Spotify and Apple Corporation
- The Story Behind the L&T- Mindtree Takeover Bid
- Do IPOs Affect Competitive Firms?
- Can Cost Cutting Turn Out To Be Expensive?
- The Economic Impact of Facebook Outage
- The Apple-Qualcomm Legal Battle
- Cross Border Credit Reporting
- The Sudden Deluge of Unicorn IPOs
- The Wow Airline Debacle
- The WeWork Business Model
- Problem with Private Securities Offerings
- The Amazon FedEx Breakup
- The Decline of the Big Corporation
- The Gap-Old Navy Breakup
- Apples Acquisition of Intels Modem Business
- Mergers and Acquisitions: A New Perspective
- The CBS-Viacom Merger
- Why are Corporations Hoarding Trillions in Cash?