FDI in E-Commerce – Will it Amaz(on) the Indian marketplace?

Online retail in India is expected to increase to $48-60 billion by 2020 from $4.47 billion in 2014. The potential size of India’s online business has attracted an unprecedented rush of cash from venture capital investors, who pumped in more than $9 billion into e-commerce firms over the past two years. Much of this has gone into luring customers through advertising and, more importantly, discounts. (source: Livemint)

The latest press note on foreign direct investment (FDI) in e-commerce has soured if not removed the said lure of e-commerce models. The policy announced last week clarifying the air around the FDI in e-commerce looks like a drag effort on part of someone walking on a tightrope and is mere a catch up act on behalf of the Indian legislators.

Vide a Press Note released on March 29, 2016 (‘Press Note’) by Department of Industrial Policy & Promotion (DIPP), 100% FDI under automatic route is permitted in marketplace based model of e-commerce, subject to certain conditions. However FDI is still not permitted in inventory based model of e-commerce. The differential being that in an inventory based model, the inventory of goods and services offered is owned and managed by the e-commerce entity and sold to the consumers directly whereas in a marketplace model, e-commerce entity only provides the information technology platform on a digital and electronic network and acts as facilitator between the buyer and seller of goods and services.

Other conditions spelled out for marketplace e commerce entities in the press note are as under:

  • E-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis
  • E-commerce market place may provide to sellers support services like warehousing, logistics, payment collection etc.
  • E-commerce entity shall not exercise ownership over goods purported to be sold
  • All the relevant details of the seller should be made available to the buyers on the website.  Post sales, delivery of goods to customers & customer satisfaction will be the responsibility of the Seller
  • E-commerce entity will not permit more than 25% of sale affected through its marketplace from one vendor or their group Companies
  • Payments for the sale may be facilitated subject to conformity with the guidelines of the Reserve Bank of India
  • Any warrantee/ guarantee of goods and services sold will be responsibility of the seller
  • E-commerce entities will not directly or indirectly influence the sale price of the good or services and shall maintain level playing field
  • Guidelines on cash and carry wholesale trading as given in the FDI Policy will apply on B2B e-commerce

Before the issuance of the said Press note, the consolidated FDI circular of 2015 allowed FDI in B2B e-commerce and B2C was restricted only to the following:

  • Products manufactured in India can be sold through the e-commerce retail
  • Single brand retail trading entity operating through brick and mortar stores can undertake e-commerce retailing
  • Indian Manufacturer i.e. the Investee Company & the owner of the Indian brand can sell its own single brand products through e-commerce retail subject to condition that 70% of the products are manufactured in house and at the most 30% are sources form Indian manufacturers

So if this is just a clarification, why is there so much of hullabaloo over the impact on the Indian e-commerce industry?

The much of the uproar is mainly around two stipulations in the guidelines:

The first being a marketplace player cannot allow one vendor or its group companies to account for more than 25 per cent of sales through its platform. The restriction intends to disallow FDI in direct vendors in e-commerce and aims at keeping the artificial separation between vendors and marketplace players. This would mean that unlike the model used by Flipkart and Amazon of using WS Retail and Cloudtail respectively as the major vendors, such E-commerce entities are not allowed to source more than 25% of fulfillments through one vendor.

The second stipulation says the marketplace player “cannot directly or indirectly influence the sale price of goods and services and shall maintain a level playing field”.  Does this spell end of competitive discounts leading to all the e-commerce players selling same goods at same price. How will the fact of “influence,” direct or indirect, be established?

Through the above two conditions, the legislation intends to ensure that foreign funded e-commerce entity should fall in line with the stipulations to ensure that the intent of acting as a marketplace reflects in the business model as well. However, the policy fails to provide a level playing field since the stipulations would make Indian owned marketplaces enjoy an undue advantage, as they are not governed by the FDI policy. This, though good for Indian businesses does not gel well with the ‘Make in India’ promotion of Indian Government. The need on the Government’s part is to make the priorities clear and act according to set priorities with absolute clarity.