Alibaba's Paytm investment raises three important questions

There are no definite answers for the questions raised here. But one thing is sure: These are interesting times in the Indian e-commerce sector

FP Editors February 06, 2015 12:40:14 IST
Alibaba's Paytm investment raises three important questions

Watch out Amazon, Flipkart and others, Chinese Alibaba is coming to India and that too with a bang.

The world's largest e-commerce company's strategic partnership with One97 Communications, the owner of m-commerce platform Paytm, is a big boost to mobile payments in India.

According to a report in The Economic Times, Ant Financial Services, an arm of Alibaba, has agreed to pick up 25 percent stake in One97 for which it will initially pay $200 million. Another $375 million is linked to performance milestones.

“India is a very important market for us because the population of 1 billion is just as large as China, while we also see the smartphone growth in India as more users will use mobile phones for payments and shopping,” Cyril Han, vice-president of Ant Financial, said in a statement.

According to a recent report by International Data Corporation, India was the fastest growing smartphone market in Asia-Pacific in the third quarter of 2014 due to the festival demand. It said in 2013 as many as 44 million units were and in 2014, it expected this to have almost doubled to more 80 million. In 2015, the quarter-on-quarter growth will continue to be moderate in India due to positive consumer sentiments and low levels of inflation, IDC said.

Online payments have also seen an exponential annual surge of 50 percent in the last seven years, says the ET report. The rising smartphone sales and a booming e-commerce sector point to the potential of the mobile payments sector. Alibaba’s interest in One97 makes it clear that in India digital payments is the space to be in.

Here are three points to ponder about the latest development:

1) Ant Financial’s move indicates that e-commerce will continue to be a darling of the investors even in 2015. While that is a big positive for the sector, it also raises concern about valuations. Vijay Shekhar Sharma, chairman and managing director of One97, had earlier told the Business Standard that Alibaba’s $575 million investment will value the company at $1.5 billion or about Rs 9,000 crore. The company’s valuation in 2011 was just $250 million.

Alibabas Paytm investment raises three important questions

Alibaba logo. AP image

This compares with the $11 billion valuation that Flipkart commands. Here too the valuation has been surging with each funding round. A recent report even said with its proposed US listing, the company is looking at a value of $5 billion.

When SoftBank invested $627 million in Snapdeal, the deal valued the Indian company at $1 billion. The BS report puts the valuation of other players in the sector such as Info Edge, JustDial and MakeMyTrip at around $1.7 billion.

Meanwhile, the ecommerce sector in India is riddled with problems, especially on the tax front. Recently, the tax department in Kerala slapped a sales tax notice of Rs 54 crore on Flipkart and three others. Prior to that, Amazon India faced tax issues in Karnataka.

The government needs to step in to resolve the issues before foreign investors’ interest in the sector wanes. E-retail has the potential to boost consumption demand – something that the Indian economy needs desperately. Will finance minister Arun Jaitley be imaginative enough to initiate some long term steps in the Union Budget 2015-16 to handhold the sunrise sector?

2) India has always been very guarded against entry of Chinese companies into the country. The resistance has been strong in sectors such as telecom equipment and heavy engineering.

One reason for the close guard is the government’s protectionist stand as it fears that Chinese companies will disrupt local manufacturers. Secondly, there are security issues, especially in sectors like telecom equipment. But Alibaba’s entry seems to show that e-commerce may be insulated from such concerns.

While this could be a welcome change in the attitude of the government in a liberalised economy, one wonders what could be the reasons behind this. Or is this only a calm before the storm? The government can raise questions any time.

3) Another more interesting point to be noted is that Sharma of Paytm has applied for a payments bank licence. As per the RBI guidelines, payment banks are aimed at furthering financial inclusion and are only allowed to provide deposits and other payments and remittance services. They cannot give loans. While the RBI allows 49 percent FDI in such institutions, will the central bank be comfortable with the Chinese connection?

There are no definite answers for these questions. But one thing is sure: These are interesting times in the Indian e-commerce sector.

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