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The Nutgraf : Jeff go back


Amazon is the symptom. Not the disease

So here’s what happened last week. 

Jeff Bezos, the CEO of Amazon, who happens to be the richest man in the world, visited India. During the trip, Bezos interacted with Amazon India’s head Amit Agarwal, and several small and medium businesses (SMBs) at an event in New Delhi. It was at this event that Bezos made an announcement. 

Over the next five years, Amazon would invest $1 billion towards digitising SMBs. This would bring 10 million SMBs online, and would export goods worth $10 billion from India to the world. 

A billion dollars. 

This was a grand announcement. It’s likely that Amazon’s PR and Corporate Communications team spent months painstakingly figuring out the right messaging—all to generate the maximum amplification from the media, and to ingratiate themselves with the Indian government, which, just like this writer, is desperately searching for any good news to talk about. 

For good measure, Bezos even did the one thing that always works in India. In a speech, he said the 21st century will be the Indian century, and that the dynamism and energy in the country was “something special“.

Announce big investment to show faith in India. Cite success measures impossible to measure. Say something flattering but sufficiently vague about India that’ll make for a great video on WhatsApp. Pitch perfect. 

Instead, here was the response, as covered in the front page of The Economic Times

It didn’t stop there. 

The next day, the chief of the Bharatiya Janata Party’s (BJP) foreign affairs department, indicated his displeasure at Jeff Bezos by alluding to editorial policies of The Washington Post—the newspaper owned by Bezos.

It had even begun much earlier.

A month earlier, Amazon had sought a meeting between Bezos and Narendra Modi in Delhi. Their request was turned down

What. Is. Going. On. 

Remember, Commerce Minister Piyush Goyal had another option. He could have said nothing. Or said something vague. Politicians do this all the time. Also, for important ministers like Goyal—whose every word is scrutinised, analysed and examined by multiple lobbies, governments and trade unions, saying a lot without saying anything at all is a necessary skill.

Which begs the question: Why take such an aggressive stance? The message wasn’t delivered privately to Amazon. It was done publicly. While their CEO was still in India. And it was quickly noticed by multiple CEOs, as The Economic Times reported,

Top executives at several multinational and Indian companies on Thursday took umbrage at commerce minister Piyush Goyal’s comment that Amazon was not doing any favour to India by announcing a fresh $1 billion investment in the country.

“Until now it used to be a matter of pride to announce such big investments into India,” said the chief executive of an MNC. “But if this is the response companies are going to get from the current dispensation, they will think twice before making or announcing investments here.”

Look, Amazon is hardly a blameless victim here. As we have written about in the past, it’s been exploiting third-party sellers in India to create business for itself—all by exploiting legal loopholes. 

It’s exploitative. It’s wrong. But, as of now, it’s legal

The problem is that, of late, for businesses in India, things are getting harder. On one hand, the definition of what’s legal, what’s not, what’s the right way to do business, is becoming…open to interpretation. On the other hand, regulations are starting to stifle new businesses. And in some cases, it’s not really clear what’s going on. 

Fine. I’ll give you five examples. 

All of which happened last week. 

First, import restrictions are getting wonkier

The bad news is that India’s exports are falling. In December, it fell by 1.8%, falling for the fifth straight month. 

Then, on Thursday, Piyush Goyal—whom you know by now, made a decision. This is what Mint reported. 

Imports of uncategorized items may soon require special licences, with the commerce ministry seeking to curb such imports by shifting them to a restricted list in a month, trade minister Piyush Goyal said.

“We have a big problem in our imports of a category called ‘others’. In that category, all sorts of stuff are being put in and imported into the country. The last analysis I got done, I found one out of four products being imported in the ‘others’ category,” Goyal said at the National Standards Conclave on Wednesday. “I appeal to everybody, who is importing any product or service into the country, please categorize your product into the respective HSN (harmonized system of nomenclature) code where it falls. If your product is imported in sufficient measure, it requires a separate HSN code.”

Importers may face serious consequences if they fail to comply with the directions, the minister said. These could be higher duty on products that come under the “others” category or requirement for a licence to import such items, he said.


I suppose the intent is to categorise items correctly, which we can all agree is important. But presumably it’s called ‘Others’ for a reason—these items do not fit existing categories. If one in five are being classified as ‘Others’, I suspect the problem lies with the categories themselves. 

Now I am not sure why someone would deliberately miscategorise items during imports – which I am sure needs to be fixed.

But special licenses? 

Second, the paperwork is getting absurd

There’s this new thing called the Independent Directors Registration. 

Previously, all directors of companies had to get an eight-digit director identification number (DIN). To obtain this, the director had to submit the attested copies of following: 

  • A Photograph
  • Identification proof, such as Aadhaar and PAN card
  • Proof of residence. 

That changed this year, and now the Independent Directors Registration that has to be completed before March 2020 on the Ministry of Corporate Affairs’ (MCA) portal. It’s mandatory.

Here’s how it goes down now

Login. Password. Email Id. DIN. Mobile number. Passport number. PAN. Full name. Gender. Father’s name. Date of birth. Nationality. Current and permanent address.

Education, from high school onwards, with name of institution, specialisation and date of completion. Professional experience, from the very first job till date, period from and up to. Professional expertise. Training programmes attended, their duration and at which institution.

All directorships, past and present, with name of each company and its 21-digit alphanumeric company identification number (CIN), nature of industry, type of directorship, appointment and cessation date. Whether key managerial positions were held and, if so, in what company and for what period. Whether the person is or was a partner in a limited liability partnership (LLP), what kind of LLP, CIN, what position and from when to when. Plus 17 other questions.

For the pleasure of filling all this up — which can take over a couple of hours’ struggle through the forms — each director must pay a fee of Rs 5,900 a year. To whom? The Indian Institute of Corporate Affairs (IICA), affiliated to and funded by MCA, headed by an IAS officer and located at Manesar, Haryana. IICA will administer this voluminous databank.

I could go on, but I’ll let Omkar Goswami, the Chairman of the Corporate and Economic Research Group (CERG) tell you all about it in his article in The Economic Times.

Again, this is mandatory.

Third, the government doubles down on zero merchant discount rate (MDR)

As we wrote in an earlier edition of The Nutgraf when the budget was announced, 

The Union Budget was presented by India’s Finance Minister Nirmala Sitharaman last week. In it, there was one particular proposal which has FinTech companies divided. It’s something called zero MDR.

But first, a quick background.

Digital payments need two things. First, enough people need to have debit or credit cards. Second, enough merchants need to accept them as instruments of payment in lieu of cash. The first is relatively easy.  The second is not.

Because from the bank’s point of view, deploying card machines is an expensive and a low-margin exercise. So somebody needs to pay for it.

But who? It’s either the customer, or the merchant. Making customers pay a fee to transact digitally seems counter-intuitive, so the banks take it from the merchant. In other words, the store accepting your card has to pay the bank when you swipe it for payments. That’s MDR, or Merchant Discount Rate.

MDR is a tricky thing. It needs to be delicately balanced—it should be high enough to incentivise banks and payment companies to go digital. But mark it too high, and merchants won’t bite. So, the RBI sets this value. Price control is the hammer for all nails.

So how was this received back then? Let me take you back. 

The Payments Council of India, the industry group representing over 75 payment companies including Visa, Mastercard, Paytm, Razorpay and Billdesk insisted that zero MDR was a bad idea and that this measure could lead to ‘the collapse of the payments industry’.

The government listened carefully.

Then, starting this month, it extended the zero MDR to RuPay cards and to United Payments Interface (UPI) transactions. 

On cue, the Payment Council of India jumped in: 

Slamming Finance Minister Nirmala Sitharaman’s announcement that digital transactions made using RuPay credit cards or UPI QR codes will not face Merchant Discount Rate (MDR) from January 1, the Payments Council of India (PCI) on Monday said the move would kill the industry and make the business model unviable.

Look, the PCI is probably being a bit alarmist, but the truth is that FinTech companies like Paytm* and PhonePe are running out of ways to make money. 

Fourth, JP Morgan gets into trouble with the courts

So here’s the story. It’s complicated, but here’s the gist. 

There was a company called Amrapali Housing Group. Which got into some trouble with the law. It was a builder, and couldn’t deliver on its promises to home buyers, so its license was cancelled. Somewhere in the middle of this, the company had made some transactions with JP Morgan, the multinational bank. JP Morgan bought shares, took a standard cut, and shares were bought back by some shell companies of Amrapali Housing Group. 

So the court is now probing this transaction. 

What’s their plan to get JP Morgan to talk? 

A bench of justices Arun Mishra and U U Lalit was told by ED Joint Director Rajeshwar Singh, who is supervising the probe against JP Morgan, that the MNC remitted the money back to the United States.

“They (JP Morgan) have a lot of properties in India. We want you to attach their office or corporate properties of a like amount. Then they will come running to us and we will see to it,” the bench said.

I leave it to you to imagine what corporations in India think about when they see news like this. 

Fifth, the AGR appeal gets struck down

In an earlier version of The Nutgraf, back in October, this is what we wrote

On Thursday, India’s Supreme Court did its beleaguered telecom sector a huge favour. It imposed a ginormous and collective retrospective charge of Rs 134,000 crore (roughly $19 billion) on every operator that has walked the sector’s cursed earth.

The collective net debt of the telecom space is close to $28 billion.

In a final judgement on a case that’s been dragging through India’s labyrinthine and sclerotic judicial system since 2003, the Supreme Court upheld the government’s rather expansive view of what counts as “adjusted gross revenue” (AGR) for operators. AGR is the annual revenue on which operators pay a percentage to the government each year as licence and spectrum fees.

Last week, this happened:

The Supreme Court rejected pleas by Vodafone Idea, Bharti Airtel and Tata Teleservices to review the October 24 verdict that widened the definition of adjusted gross revenue (AGR), leaving the three telcos collectively facing more than Rs 1.02 lakh crore in additional licence fees, spectrum usage charges (SUC), penalties and interest.

Analysts and industry executives said Vodafone Idea and Bharti Airtel are likely to file curative petitions, besides applying to the court for more time to make the payments—a combined Rs 89,000 crore for the two. Failure to get these reliefs could potentially bring the curtain down on UK-based Vodafone Group’s struggling telecom joint venture with the Aditya Birla Group.

Don’t forget—back in 2016, Vodafone pumped Rs 47,000 crore into its Indian entity, which remains the largest foreign direct investment into India. That’s about $7 billion. Now it’s left Airtel and Reliance Jio with a duopoly. 

On the e-commerce side, we are left with Flipkart, and the soon to be launched Reliance e-commerce enterprise—Jiomart. 

Somebody should tell Jeff Bezos that he could pony up another $6 Billion, and even then, there would be no guarantees that he’d succeed.

Now, over to Sumanth

Two exits. Three reasons

Despite the attention and focus on venture investing in the last decade, at its heart, venture capital is an artisanal industry—more art, less science. 

But there is one rule of thumb—the trick to successful VC investing is to find at least one unicorn-type company that can potentially provide an exit that returns the entire fund. So, the investing trick to aspire for is to find such a company and ride it all the way to an IPO or a multi-billion acquisition. It is rare for a VC to cash out her chips from a unicorn investment prematurely in the form of a secondary sale of shares to another investor.

Therefore, it came as a surprise to many that there was not just one but two secondary exits: 

First, Swiggy. Investors like Norwest, SAIF, Bessemer and Accel cashed out nearly Rs 1,600 crore ($225 million) from a secondary sale. 

Second, Byju’s. Another set of investors—Sequoia Capital, Times Internet and the Chan Zuckerberg Initiative (Mark Zuckerberg’s impact fund)—cashed out of Byju’s, netting Rs 2,200 crore ($320 million).

So, what prompted these exits?

Usually, there are three broad reasons why VCs might have been motivated to exit in a secondary deal.

First, the reason could be purely financial. A VC might have reached a satisfactory exit target in terms of exit multiple or absolute value. Sequoia, for instance, netted Rs 1,665 crore ($250 Mn) from Byju’s, an exit multiple of more than 20X—both excellent numbers. Also, it might be important to keep in mind that VCs are judged not just by absolute returns but also by IRR (internal rate of return)—this metric carries a time dimension. So, cashing out for 20X in say 5 years might offer a better IRR than waiting for 10 years to cash out at a potentially higher multiple. Also, most of these investors have made partial exits rather than sell their complete holdings—this is potentially a best of both worlds scenario, where the VC has seen a great cash exit but can still stick along for the rest of the ride to realise further upside to the residual holding.

The second reason could be strategic. A VC might decide that the company might have reached a local maxima in terms of valuation—this could be due to a number of factors related to the startup—growth rates, unit economics, competition, etc.—or related to broader macro factors like consumption growth, capital availability, etc. There could also be one-off factors that might be opportune or timely—for instance in these cases, the inclination of Naspers to double down on its investments in India after exiting Flipkart. VCs might also use secondary exits for signalling purposes—to demonstrate realised gains both to their own investors (LPs) and to new potential investors, especially when they plan to raise larger funds in the near future.

But it is the third reason that could be the most interesting. A VC might choose to exit a rocket startup if it comes across instances of poor governance or outright fraud. When such instances arise, instead of making a hue and a cry, a VC might choose to simply cash out and silently head towards the exit door.

Specifically for the secondary exits in Byju’s and Swiggy, at this point in time, it is difficult to tell for sure as to which of these three reasons played a part in motivating the decision but we will probably know the answer to this question in the next couple of years. That should make for interesting reading. 

That’s about it from this week.