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fdi in online travel portal


Hello,

I wanted to understand the concept of FDI in online travel agency. For instance, if an online travel portal with business in many other countries want to enter Indian market, what are related procedures for the same?

 
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www.Mehnat.IN

This is a very difficult question. You are unlikely to get a complete answer here.

www.mehnat.in

 
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Senior Partner

I disagree to Manish.

 

The question to me is a innocent question and not that difficult to reply. Inncoent because the queriest has no clue of FDI policies of GOI vis-avis e-commerce otherwise he would not have asked the query in reference to e-commerce.

 

Be it so, the Government had categorically stated after allowing upto 51% FDI in multi-brand retail earlier last year that, “e-commerce in both multi- and single-brand retail is not permissible for companies with FDI”.

 

Simplifying above let us understand above quote and un-quote by referring to current ED (Enforecement Directorate) probe going on against www.flipkart.com which seems to have violated FDI policies and to illustrate the same I say Flipkart seems to have created complex business structures to bypass the current FDI norms. This involves setting up a B2B company which deals with all their sourcing, inventory, technology and operations part of the business and a parallely they formed a B2C company which handles the invoicing and payments. To me by creating a multi-tier corporate structure if a foreign and an Indian retailer have a 51:49 JV, then the firm would be categorised as Indian-owned and managed is what probably is the plea Flipkart has before ED J . Nevertheless I can always afford to wait for clarity to come out from this first case in ED radar in reference to context

 

Here is the catch (loophole) a smart player may exploit and since B2B players are allowed to have 100% FDI, this amounts to a successful hack on the current regulations. In www.flipkart.com case, the B2B company is called Flipkart Online Services and the B2C one is called WS Retail.

 

If the Government decides that these B2B and B2C company structures of Indian e-commerce firms amount to violation of the norms, then this might be a bitter pill to swallow for all Indian e-commerce firms which employ the same structures for their operations prior to seeking FDI investments.

 

However, with a view to stimulate domestic and international investments in this sector, the GOI has permitted 100% FDI in the automatic route – allowing full FDI into all construction development projects including construction of hotels and resorts, recreational facilities, and city and regional level infrastructure, all airport expansion projects subject to the condition that FDI for upgradation of existing airports requires Foreign Investment Promotion Board (FIPB) approval beyond 74 percent. A five year tax holiday has been given to organizations that set up hotels, resorts and convention centers at specific destinations, subject to fulfillment with the agreed conditions. Some international hospitality majors such as Hilton, Accor, Marriott International, Berggruen Hotels, Cabana Hotels, Premier Travel Inn (PTI) and InterContinental Hotels group have already announced major venture plans in India in recent years. It is expected that the hospitality division is expected to see an additional US$11.41 billion in inbound investments over the next two years.

 

The RBI has recommended a quarterly or annual reporting on the delivery and procedure of foreign inward payment, granting permission or license for running a hotel under which construction of the hotel should be finished within a given period, and norms under which the investor or the investee company would not be allowed to sell undeveloped plots. There are many limitations on buying of assets by non-residents. If they are establishing an office in India, which is not just a liaison office, the RBI allows them to acquire fixed property. In such cases, a statement is necessary to be filed with the RBI within 90 days of acquiring the property. Overseas citizens of non-Indian origin who have acquired fixed property in India cannot relocate the property without the RBI’s consent.


The new rules stipulate that foreign retailers will have to invest a minimum of $100 million, and at least 50% of the total FDI brought in will have to be invested in backend infrastructure. They will have to source 30% of products from small industry within five years of operations, and every year subsequently.

If above is understood then a online travel portal if wants to have footprints in India via FDI e-commerce then I would suggest them that they would have to change their format and do it in the brick and mortar form or be a part of some multi-layering corporate structure as illustrated above in Flipkart's case.

Reason being it is due to problems in regulation as well as restrictions in the policy such as the states where it can be applicable. The multi-brand retail norms require that 50% of the investments be made in the back-end infrastructure. It would be difficult to monitor their investment break-up. Further, since the option to allow FDI in retail would lie with the state governments, it would be difficult to check inter-state transactions in e-commerce activities

Hope you got the concept query clarified more than you asked?

 
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