The e-commerce market in India grew by a whopping 30 percent from 2011 to the end of 2015 and is expected to double again by December this year. Chandni Chawla and Kripi Kathuria of Phoenix Legal explore the legal landscape for investors.

The increased use of technology has paved its way into our daily lives causing consumers to rely on it for availing even the most unconventional goods and services. This accelerated use of technology is attributed to the availability of smartphones and internet connectivity at affordable prices. Such rapid development and dependency on technology has proved to be a boon for the e-commerce industry, homegrown and global alike.

As per reports, the e-commerce market in India grew by a whopping 30 percent between December 2011 and December 2015, valued at Rs1.26 billion (US$18bn) by the end of December 2015 and is expected to double to Rs2.11 billion by December this year. Leading the statistics is the online air travel sector, which accounts for almost 63 percent of the overall share, while electronic retailing popularly known as e-tailing, remains the most dominant non-travel online spend.

Expected to form the largest part of the Indian internet market with a value of approximately US$100 billion by the year 2020, the e-commerce industry in India has witnessed tremendous investment activity during the past few years. According to a report published by the Confederation of Indian Industry earlier this year, there were an estimate of 259 M&A deals worth US$2.43 billion in the e-commerce sector in 2015.

Apart from the global e-commerce giant Amazon, the majority of home grown e-commerce companies have received funding from foreign parties evidencing India as a profitable market for investment. With the sudden surge in investment activity in the e-commerce sector and foreseeing the untapped potential, the Government has also taken steps to propose regulations for streamlining the foreign investment in the sector. The Department of Industrial Policy and Promotion has introduced notification under the Consolidated Foreign Direct Investment (FDI) Policy by way of Press Notes issued early this year. By way of these guidelines, the Government has allowed 100 percent FDI under the automatic route in business to business (B2B) e-commerce.

The guidelines distinguish between ‘inventory-based model’ and ‘marketplace-based model’ of e-commerce. The ‘inventory based model’ has been defined to mean an e-commerce activity wherein inventory of goods and services is owned by the e-commerce entity and is sold to consumers directly. While, the ‘marketplace based model’ has been defined as providing an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.

The department has permitted 100 percent FDI only in the ‘marketplace based structure’, however, no FDI has been permitted in the ‘inventory based structure’. The guidelines also lay down conditions applicable on such foreign investments to systemise investment in the sector. One such significant condition prescribed under the guidelines is the cap on sale from one vendor or its group companies. The condition restricts e-commerce companies from selling more than 25 percent from a single vendor or its group companies.

The highest influx of investment in the e-commerce sector was in the financial year 2015. However, this move by the government is expected to increase the inflow of FDI in the B2B sector.

In addition to the conventional services that are already on offer, the e-commerce industry is witnessing the emergence of a number or e-commerce aggregators that are poised to digitize a host of off-line services to create user-friendly and convenient platforms for customers. At the forefront of this unparalleled industry growth is an upsurge of mergers and acquisitions in the industry.

2016 has been a booming year for the Indian e-commerce industry with Flipkart-owned Myntra acquiring Jabong in the retail e-commerce fashion and lifestyle market and MakeMyTrip’s merging with Ibibo, in the e-commerce travel market.

Myntra’s acquisition of Jabong
In late July 2016, Flipkart owned Myntra acquired Jabong in a cash deal that valued Jabong at US$70 million. The acquisition was reportedly aimed at providing Flipkart the backing they would need to compete effectively with global giants such as Amazon. Prior to the acquisition, Flipkart and Myntra together held close to 60 percent of the market share in the online fashion and lifestyle market, this figure jumped to a whopping 75 percent post the acquisition.

Although the deal was essential for Flipkart to remain at the top of the food chain in a cut-throat industry that is poised to overtake the consumer electronics industry by 2020, the reality was that Jabong which was a major player in the fashion and lifestyle market, had been steadily deteriorating as its investors had decided against aggressively injecting capital into a business that thrives on heavy discounting. For the financial year ended March 2016, Jabong’s total sales were Rs9.4 billion with a negative Ebitda of Rs4.15 billion leading to questions regarding how the company was actually valued.

Though the hidden objective behind the acquisition seems to be a block and tackle approach, followed by Flipkart, the acquisition has led to the trio being poised to lead the fashion and lifestyle segment, which is set to contribute approximately US$40 billion of the US$110 billion e-commerce industry by 2020.

MakeMyTrip’s merger with Ibibo
In a deal valued at approximately US$720 million by some sources, MakeMyTrip and Ibibo have agreed to combine their businesses in an all-stock transaction that will lead to emergence of a new entity MakeMyTrip Limited (MMYT/ emerging entity). This consolidation will lead to some of the biggest consumer travel brands such as MakeMyTrip, goibibo, Rightstay, redBus and Ryde coming under one roof, all of which together processed close to 34.1 million transactions in 2015-16.

According to the terms of the deal, South Africa’s Naspers and Tencent, which own 91 percent and 9 percent of the holding company that controls Ibibo, respectively, will exchange its 100 percent stake in Ibibo for a 40 percent stake in MMYT to become the largest shareholders in the emerging entity with a 40 percent stake.

In an extremely unpenetrated and fragmented market, the prospects of the emerging entity seem promising as it may provide Indian travellers a one-stop solution for all their travel needs. The deal is expected to give the much larger-sized MMYT the muscle to take on competitors such as Yatra, which is co-owned by the Ambani brothers and Cleartrip, which is backed by US-based Concur Technologies.

The final transaction is expected to close by the end of December this year, after which MMYT will own 100 percent of ibibo. A Morgan Stanley note puts the combined value of MakeMyTrip-ibibo at US$1.8 billion.

Though the main objective behind the deals summarised above seem to be consolidation, the reality is that most of the mergers and acquisitions in the e-commerce space have largely been a result of the inability of companies to raise additional capital and eliminate competition, or because they have been forced by common investors.

The rapid upsurge in the number of transactions in the e-commerce sector have led to proportionate increase in competition in the sector. Companies looking to enter the e-commerce space and operate profitably, now face series of challenges.

The biggest challenge faced by online retail companies is the lack of end-to-end logistics platform with issues relating to transportation and lack of procurement options. Further, with the options available and the indecisiveness of the consumers, there are reverse logistics issues faced by online companies.To meet the demands of the customers and to tackle competition, major players in the market such as Flipkart have set up several warehouses in different states and is constantly increasing the supplier base across the country to achieve low transportation cost and timely delivery by ensuring delivery from the nearest supplier or regional warehouse.Initially, most companies had outsourced the delivery leg of its operations and relied on third party firms. Over a period of time, one can notice online retail companies making acquisitions of logistics companies to tackle this problem.Payment mechanism
Traditionally, India has relied mostly on cash transactions due to limited banking options and availability of credit to the common man. Further, there is wariness amongst the consumers regarding the security features on the websites and there is reluctance in giving out personal information including credit card information on the website. Online retailers have had to introduce and keep in place cash-on-delivery systems which imposes significant cost on the retailer in the form of employing extra manpower or having
it outsourced.Funding
Following the recent trend globally, there has been a drying-up of funds and decline in investments from venture capitalists in the e-commerce sector. While this may not hinder the market share of established players, it could slow down the entry of new entrants in the e-commerce sector who are dependent on funding to fight for the market share.Losses
Due to the entry of a sheer number of companies in the e-commerce sector, the competition between the online retailers is at an all-time high. The customer is offered a large variety of choices spread over an enormous geographical area. To attract customers to their website, the focus is to maintain an aggressive pricing mechanism. Retailers such as Flipkart, Amazon and Snapdeal are all suffering staggering losses in their bid of offering sales and attractive discounts to the customer all year round.

Tier 2 and 3 cities
The online retailers have begun to shift their focus to Tier-2 and Tier-3 cities since the sales are expected to significantly increase, thanks to the emergence of low cost smartphones and tablets and the widespread use of internet. The companies are, however, dependent on telecom operators to roll out 3G/4G service into such areas so that the consumers can enjoy seamless connectivity.


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