INSIGHT: Jio-Facebook Deal—Beginning of New Era for Digital Alliances

Amidst widespread speculation about the fate of Indian markets after the lockdown and while India witnessed a lifetime high FPI withdrawal of about $19 billion from its market in the beginning of March 2020, investment by the Silicon Valley social media giant, Facebook of $5.7 billion for 9.99% stake in Jio Platforms, a 100% subsidiary of Indian conglomerate - Reliance Industries Limited, is a big bet on the Indian economy in the post pandemic world. This deal is India’s largest foreign investment in technology sector apart from being the largest investment for a minority stake by a technology company in the world. Furtherance to the deal, Facebook’s WhatsApp, Jio platforms, and Reliance Retail have also entered into a commercial pact to boost Reliance Retail’s JioMart project using WhatsApp.

India is largest single market for Facebook with 400 million WhatsApp users and Jio holds 32% share in India’s telecom market with around 388 million users. Synergizing this with the support of small and medium neighbourhood stores, JioMart can easily penetrate into the rural markets focusing on faster delivery of groceries and day-to-day needs. These two leaders have been preparing themselves to take over larger players in one of the world’s most competitive e-commerce market and this alliance could be regarded as a six on the dice of this game, at a time when the global economy is teetering on the brink.

It seems that the Indian billionaire and chairman of Reliance Industries, Mukesh Ambani had envisioned the conglomerate to achieve this diversification. The synergy by way of minority stake sale deal in Jio Platforms to Facebook brings a ray of hope for Reliance as this deal not only raises $5.7 billion but also opens the door of interest among numerous technology-driven networking firms situated globally towards India. Banking on the era of digital economy, Reliance had shown an impeccable attentiveness towards the growth of its digital and communication division and indication of another similar strategic investments in Jio Platforms at the end of March 2020.

The management of the Indian conglomerate expects to raise $14 billion by the year end, which includes stake sale deal to Facebook and rights issue already announced, with a clear invitation for such similar strategic collaborations to the investors in the Silicon Valley. American private equity giant Silver Lake Partners, a global leader in technology investments announced an investment $747 million for 1.15% stake in Jio platforms, giving a 12.5% premium to valuation of the Facebook investment in less than two weeks of its announcement. The enterprise value of Jio Platforms is now 5.15 trillion Indian rupees, putting it in the same stable of companies having large digital ecosystems. In a quick succession, Jio Platforms attracted significant investments from a clutch of large private equity firms such as Vista Equity Partners and General Atlantic, at marginal premium over fetched valuations.

Digital is no longer a part of the economy—it is an economy itself. Data seems to be the oil of this digital era. In days to come, data collection and analysis would become the basis of all future service offerings and business models. With the controlled impact of the pandemic on the country and availability of highly skilled manpower well-versed in IT enabled services, India would continue to be the strongest foreign direct investment destinations for the global tech industry in the era post Covid-19 crisis. Nevertheless, apart from natural business considerations, this synergetic deal between Reliance and Facebook could also be viewed in the light of shifting tax and regulatory developments in India. Introduction of Personal Data Protection Bill has marked India’s data sovereignty vision, need for territorial localisation of data and is expected to become a law sooner than later. Introduced in India’s parliament in December 2019, the Personal Data Protection Bill is destined to set rules on how personal data would be processed and stored.

The inapp digital payment services of WhatsApp, WhatsApp Pay was on hold in India for almost two long years on account of mandatory requirement imposed by the Reserve Bank of India for storing all critical data only in the systems within India. With the agreement to comply with these regulations, WhatsApp Pay has finally received necessary approvals from the Apex Bank and National Payments Corporation of India, but this might impose tax challenges on Facebook in India if data is stored on servers of Facebook/ WhatsApp locally in India.

It would also be interesting to see how the payment services of WhatsApp is integrated in the Jio-Facebook collaboration as Jio has in-house payment solution services, Jio Money, bundled with various other digital services. India has also introduced tax on digital transactions at 2% of gross consideration by expanding the scope of Equalisation Levy to include e-commerce supply of goods and provision of services online to Indian resident by non-residents who owns, operates or manages digital platforms or facilities. The ambit of this levy in its new avatar also covers extra territorial levy on transactions between non-residents outside India—first being sale of data collected from Indian residents and second being advertisements targeting Indian residents.

Technology has become one of the most powerful sectors shaping the global economy, driving changes and setting trends. The top seats of most valued global brands are occupied by tech giants. Mammoth tech corporations such as Facebook, given their global and pan-jurisdiction reach are distinctively placed to lead and effect an internet boom in India. Jio, racking up 388 million users, in four years, has undoubtedly pushed Indians to increasingly live digital lives. The investment by Facebook in Jio Platforms reveals the world that the upcoming future is digital, and that future belongs to India. This marriage is a story that could define fate of India’s digital economy in the years to come. May be India’s wait for its own e-commerce hectocorn would soon be over!

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Rakesh Nangia is chairman of Nangia Andersen Consulting, and Sandeep Jhunjhunwala is a partner. Mr. Nangia is a tax veteran with significant experience in advising Fortune 500 multinationals and Indian business houses on taxes and regulatory policies. Rakesh has been the National President of The Indo-Canadian Business Chamber and presently serving as the Co-Chairman at ASSOCHAM’s International tax council.