Problem remains for e-commerce majors

Most e-commerce firms with 'Singapore holding structures' would opt out of new Sebi platform

The Securities and Exchange Board of India (Sebi) has announced a new institutional trading platform for start-ups, with fanfare.

However, the e-commerce world, where all the action and excitement has been bubbling over the past year or so, has not jumped in with Initial Public Offer announcements.

While Flipkart has been quiet, Snapdeal issued an statement that the move “will benefit India-focused companies like ours in the long run”.

The operational part of this sentence is “long run”. Last August, Business Standard first threw light on the cross-border structure and ownership pattern of Flipkart, gathering details filed by the company with the Singapore regulator (https://www.business-standard.com/article/companies/decoding-flipkart-the-other-people-numbers-114080400147_1.html). As said in this article, their main firm, Flipkart Pvt Ltd, mother ship which owns its Indian marketplace and other subsidiaries, is based in Singapore. See the graphic on the structure here: https://www.business-standard.com/content/general_pdf/080414_05.pdf.

In November, Mint also talked in detail about the complex structure of Flipkart, revolving around its Singapore-based firm. This story has a beautiful infographic of the Flipkart structure, with the Singapore firm at its centre (http://www.livemint.com/Companies/VXr8oJzNJ4daOYSO5wNETN/Inside-Flipkarts-complex-structure.html).

A reading of these two stories would show that all the billions of dollars that have come into these structures are through the Singapore vehicle. Since there is uncertainty in government policy as to whether foreign direct investment (FDI) is allowed in such companies, almost all e-commerce entities have adopted this model, of routing investments through Singapore.

Now, listing a Singapore company (start-up or otherwise) in India is easier said than done. Both in the old platform and in the new. These are simply not possible because of the Foreign Exchange Management Act and capital account convertibility issues. It is rather safe to say it is practically impossible.

Can, then, the Flipkarts and Snapdeals of the world list their Indian subsidiaries, which are marketplace and technology firms?

According to the new platform rules spelt out by Sebi, at least 25 per cent of the pre-issue capital must be held by Qualified Institutional Buyers (QIBs). These stories will show that the Singapore firms typically own 90-99 per cent in these companies. So, should these be restructured again to include QIBs? But, if they do that, the FDI policy could come into play. That would defeat the purpose of taking off to Singapore in the first place.

Thus, there is no question of these e-commerce giants operating through a 'Singapore holding company structure' listing here under the new rules in their present form. It might be possible after some structural rejig but the firms might not find it worth the trouble until some clarity emerges on FDI policy.

Listing abroad, say on Nasdaq, would still make more sense for them, as investors there are more mature, markets are more liquid and have the capacity to absorb multi-billion dollar listings.

Who, then, will the start-up platform benefit? The Sebi press release mentions “companies which are intensive in their use of technology, information technology, intellectual property, data analytics, bio-technology, nano-technology to provide products, services or business platforms with substantial value addition”.

According to figures quoted by Sebi, there are 3,100 start-ups which have got funding. It is possible that many of these could be in the non-retail space. It is possible that these could have already satisfied the 25 per cent QIB requirement. For example, it could benefit companies such as the taxi aggregators, provided they operate through India-registered entities and their investments have come in at an India level.

ANI Technologies, which runs Ola Cabs, is India-registered and has local funding. Companies such as ANI could be in a better position to make use of the new Sebi platform than Flipkart and Snapdeal. There could also be intellectual property, data and nanotech firms. But, they are still not making those multi-billion dollar headlines that might excite the high net worth investors.