Rajan says start-ups' unviable if revenues only due to discounts

Remarks come on the heels of multiple reports of e-comm cos facing valuation write-downs and sacking of employees

Reserve Bank of India Governor Raghuram Rajan today flayed e-commerce firms' discount-driven business model that focuses on revenues and not profits.

"If the only reason you are getting revenues, not profit, is because you are selling based on 50% discount, it can't be viable in the long run," he said after delivering the Y.B. Chavan Memorial Lecture here. At a time when e-commerce businesses are still trying to establish themselves while being financed by the deep pockets of foreign venture capitalists, Rajan said it was only natural that some entities would not work and eventually shut down.

Rajan's remarks come on the heels of multiple reports of large e-commerce firms facing valuation write-downs from their original investors, while many such start-ups are laying off employees, while others have announced plans to either scale back operations or shut down completely.

Rajan also quipped it was necessary to realise that often a business model was flawed if it did not recoup returns for a certain period, adding that it was better such entities were allowed to die out rather than kept alive only because the legal framework did not have an easy exit for such "zombie" firms. "I think this (shut down) is a natural process and we should not stand in the way and lament too much," Rajan said.

The RBI governor also batted for some essential safety covers, health insurance, unemployment insurance, and pensions to ensure "social peace" but added that such safety nets should not be "gold plated" which would make it easy for people to stay unproductive and out of jobs.

He added that the Bankruptcy Code the government is expected to introduce in the current Parliament session would enable exits for entrepreneurs and start-ups, which was an essential requirement for investors to come in the first place.

Rajan said that the Code would also create a level playing field as currently banks tend to give more time to large borrowers who can tackle their might legally, while smaller borrowers often don't have the resources to take on lenders in court. -Cogencis