Smaller startups take maximum hit under FDI rules

MUMBAI: Flipkart cofounder Binny Bansal denounced the revised framework for foreign investment in the Indian ecommerce sector, saying small startups and early-stage companies were being adversely hit by the new rules.

The new regulations come in the way of innovation and company creation, along with being a deterrent for investors who want to take a long-term view of India, Bansal said during a chat with ET. Big companies will figure out how to navigate through this as they have lots of capital and large teams to take care of the issue, but fledgling startups will suffer and they are going to be the biggest losers, he said.

Many startups are seeing their funding rounds being put on hold as there is no clarity on how to do business, said Bansal, who stepped down from Flipkart in November. “There is uncertainty and confusion everywhere which is what I am seeing.”

Bansal’s criticism of the policy is one of the first high-profile voices to come forth on the topic from the startup ecosystem.

Citing the example of a four-year-old Chinese social ecommerce company, Pinduoduo, which went public six months ago valued at $23 billion, Bansal said he was worried that a similar sort of innovation would be stymied in India amid the ever-changing regulations. Pinduoduo became huge, despite having to compete with well-entrenched players like Alibaba and JD.com in the Chinese market. “The government should create policy and stick to it so that there can be clarity; else it creates havoc,” he said.

Amazon and Walmart-owned Flipkart have been severely impacted by the new regulations even as they undergo restructuring of their businesses. The rules, which kicked in on February 1, prevent online retailers from selling products through preferred merchants in which they hold an equity stake. Also, wholesale arms of Amazon and Flipkart, which were set up to serve these big sellers, cannot supply more than 25% of goods to these vendors.

Morgan Stanley, taking note of the changed regulatory environment, said a possible Walmart retreat from India due to these adversarial policies could not be ruled out, as ET reported in its February 5 edition.

Away from ecommerce, Bansal is actively investing in startups personally and through a fund, 021. He has also taken on the role of chairman at xto10x Technologies, a startup founded by Saikiran Krishnamurthy, an ex-Flipkart and McKinsey employee. The 37-year-old said he plans to personally invest in startups in the US and Southeast Asia, and take the services offered by xto10x global. As reported by ET in its December 14 edition, xto10x is targeting Series-B and C startups and will offer them software tools, consulting on a self-serve model, as well as mentorship and learning.

Bansal, who owns 4% of Flipkart and holds a board position at the ecommerce major, left the company he cofounded with Sachin Bansal after a probe was conducted to investigate him on charges of “personal misconduct”, although Walmart said those charges weren’t found to be true. He said he had “moved on” since then and was looking ahead to back new opportunities by investing in startups.