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FDI on E-commerce: Its Impact on the E-commerce Companies

, November 2, 2016, 0 Comments

flipkart-e-commerce-marketexpressWith the onset of LPG, India has seen a rise in the flow of FDI into the country. Though this phenomenon is good for the economy, unbridled inflow is not without danger. Being aware of this menace, the government has laid down the conditions for its flow inwards.While the government has permitted 100% FDI in many sectors and it has prescribed some restrictions in certain other sectors. Retail is one such area where there are quite a few restrictions.

While FDI up to 100% under automatic route is permitted in Business to Business (B2B) e-commerce, no FDI is permitted in Business to Consumer (B2C) except in following circumstances:

  1. A manufacturer is permitted to sell its products manufactured in India through e-commerce retail.
  2. A single brand retail trading entity operating through brick and mortar stores, is permitted to undertake retail trading through e-commerce.
  • An Indian manufacturer is permitted to sell its own single brand products through e-commerce retail. Indian manufacturer would be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, at most 30% from Indian manufacturers.

The New Guidelines

The new guidelines became necessary because in the guise of e-commerce many players have been accessing FDI funds while behaving like quasi retailers. This has altered the playing field in favour of the e-commerce companies. The note issued by Department of Industrial Promotion and Policy (DIPP) also clearly defines certain terms in order to remove any ambiguity while dealing with this matter. The definitions are reproduced below:

  1. E-commerce: E-commerce means buying and selling of goods and services including digital products over digital & electronic network.
  2. E-commerce entity: E-commerce entity means a company incorporated under the Companies Act 1956 or the Companies Act 2013 or a foreign company covered under section 2(42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2 (v) (iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.
  • Inventory based model of e-commerce: Inventory based model of e-commerce means an e-commerce activity where the inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
  1. Marketplace based model of e-commerce: Marketplace based model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

The above clarification along with the new guidelines, the retailers unanimously believe, would create a level playing field.

Among the ten conditions laid down, the two important that would impact the players, are

  1. The condition that “an e-commerce entity will not permit more than 25% of the sales effected through its marketplace from one vendor or their group companies” and
  2. E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field.

The Fall-out

The fallouts of these guidelines are very clear. The first consequence is that it has clamped down on discounts and predatory pricing. One may not expect to see “big-billion sales” etc., in the future because of the condition b) above.

No FDI in B2C e-commerce means that Amazon or foreign-funded players such as Flipkart cannot operate under an inventory-led model.

In effect, these companies could not simply buy merchandise from various wholesalers, stock them in their warehouses and sell them on their website. In the marketplace model, these companies can act as an intermediary for sellers and buyers. These entities don’t own inventory.

The old marketplace model allowed the company to sidestep regulatory hurdles that prevent foreign retailers from owning an Indian arm for direct sales. In the old marketplace model, e-commerce entity could not own any merchandise sold but act as platform for any retailer who wishes to sell his products. However, the problem here is the quality of service, shopping, delivery and overall customer satisfaction which tends to be low. Cleverly, to circumvent this problem, Flipkart and Amazon established a ‘primary seller’ each. WS Retail Services and Cloudtail India Pvt., Ltd., for Flipkart and Amazon respectively contributing more than 25% of their sales online. Both these organizations can be traced back to Flipkart and Amazon respectively.

Now with the new regulations in place, allowing 100% FDI in e-commerce marketplace, with a rider that “no one vendor in the marketplace should be allowed to contribute more than 25% of the company’s overall sales” Cloudtail and WS Retail Services will have to reduce their contributions and allow a more level-playing field to India’s traditional retailers.

In contrast, Snapdeal, since 2012, continued on the marketplace model and did not resort to measures such as propping up a primary seller. Though it lagged behind the competitors, it did it with less capital. Consequently, the new 25% seller rule will not affect it as much as Flipkart and Amazon.

Kumar Rajagopalan, CEO, Retailers Association of India (RAI) while welcoming the new guidelines said, “The note is testimony to the fact that the government wants to ensure a level playing field for all channels. The move received much appreciation from all members of RAI”.

The All India Online Vendors Association also, in a statement welcomed the new guidelines and said that the new 25% rule will allow online retail companies to widen their seller base.

Retailers were positive that, if enforced, the policy will in fact foster a new environment of collaboration between retailers and marketplaces that would ensure customer convenience and delight.