The comical nature of India’s foreign investment regulations came to the fore in April this year. That’s when the Department of Industrial Promotion, a commerce regulatory body under the country’s Ministry of Commerce, told Amazon that it could not sell food and groceries alongside all the other products it sells online, such as smartphones, apparel, furniture, etc.

By then, Amazon had already set up a separate subsidiary to enter the food and grocery business and had planned to invest Rs 3,500 crore ($509.25 million) into this venture. It had also begun a pilot in Pune to expand its food delivery business.

Of course, Amazon wasn’t about to shut down its plans to retail food and groceries in India. Only ignorant and insignificant players view India’s regulations as permanent obstacles. For behemoths like Amazon, these regulations are meant to be delicately sidestepped.

In Amazon’s case, it would need to show the powers that be that, hey, look, there’s now another entity that’s selling food and groceries, and that entity is not us. We pinky swear.

Loopholinomics

It is a reality that is easily forgotten—retail, both offline and online, is a tricky business in India. Till 2013, India didn’t allow foreign investment in large retail stores, nor in online retail. Why? Because political parties didn’t want to antagonise small traders and retailers.

But in a tense parliamentary vote in 2013, India opened its doors for foreign investment in retail. This was hailed as one of the greatest reforms the country had seen.

But there was a catch—the doors were being opened only for physical retail via stores. Ouch. Given that foreign investors (including most large venture capital firms) had already invested hundreds of millions of dollars in Indian e-commerce startups, were they afoul of the law? Well, there was a loophole. The government hadn’t defined what an online marketplace was. Which meant companies, startups, investors and lawyers started looking at an earlier law from 2010, where the government had allowed foreign investment in e-commerce, but only for wholesale trading.

Every law has a catch. Every catch has a loophole.

In the case of e-commerce, this loophole would soon become, for all practical purposes, a door.

A door that opens up to a network of subsidiaries and holding company structures, some in India, some outside, to circumvent the foreign investment regulations.

India’s largest e-commerce company Flipkart (now majority owned by Walmart) started as one company, but had by 2017, multiplied into 14 companies owned through holding companies based out of Singapore. Why Singapore? Because being there helped it source money from investors better than being in India.

AUTHOR

Vivek Ananth

After dabbling with an auditing job and then at a software product company, Vivek Ananth has decided to take the plunge into journalism. In his last assignment, Vivek was at Cogencis, a financial newswire. A Chartered Accountant, Vivek completed his post-graduate diploma in journalism from IIJNM Bengaluru in 2016. At The Ken, Vivek will write on the intersection of technology and business.

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