The new additions made to the already elaborate FDI (Foreign Direct Investment) guidelines have created quite a buzz in the Indian e-commerce market and numerous opinions have arisen regarding the same. Some agree to the new terms and strongly believe they make sense, some think it would affect the e-commerce business adversely and ruin matters for many enterprises that were once flourishing.
To understand this better, let’s walk through the changes made and reach our own conclusions through rationality, without prejudice.
In the year 2015, the Department of Industrial Policy & Promotion (DIPP) had sanctioned the sectoral cap in e-commerce sector to have a 100 per cent of FDI, which meant that one could acquire an entire 100 per cent of equity through foreign direct investment.
The Government added a twist to the investment game when it stated that it would not allow a foreign company to pitch in 100 per cent if it is a Business-to-Consumer e-commerce activity. However, it will allow the same for the Business-to-Business segment.
The Government has said that as the guidelines e-marketplaces will act as facilitators between a buyer and a seller.
The marketplaces aid the sellers by offering various services like warehousing, logistics and collection of payments to registered sellers on their platform; this service falls under the Business-to-Business e-commerce network as per the extant policies where India allows FDI to firms that are engaged in business but not. However, retail stores were not offered the same services.
This shook brick-and-mortar stores, who approached the Government with their concerns. The Government, looking into the matter, issued Press Note 3, which mentions each amendment as clarifications made to the guidelines under Consolidated FD1 Policy Circular of 2015:
- Complete 100 per cent FDI is permitted under the automatic route in a ‘marketplace’ model of the e-commerce network.
- Inventory based models made with e-commerce networks will not be permitted an FDI.
- An e-commerce enterprise providing a marketplace shall not carry out ownership over an inventory for instance, i.e. taking ownership for goods that are meant to be sold. As such ownership over an inventory will turn into making the business model into an inventory based.
- An e-commerce enterprise shall not allow more than 25 per cent of the sales initiated through the marketplace from one merchant or their set of companies.
- The e-commerce marketplaces have the option of providing support through warehousing, logistics, customer care service, payments for a seller.
- Another addition to the guideline that holds a vital place is that an e-commerce enterprise shall not directly or indirectly have an effect on the pricing of goods or services and will maintain a level playing field.
- A manufacturer has the right to sell their own manufactured products nationally through e-commerce retailing.
- Also, a single brand retailer who is operating through a brick and mortar store is allowed to undertake retailing through an e-commerce path.
The players that gain the most out of the new rules being implemented are e-commerce ventures that are entirely owned by Indian retailers and have not explored FDI options. It was evident that offline traders would benefit, but no one realized the potential this held for online retailers as well. Restrictions on sourcing products, marking down prices and adding discounts to them will only apply to e-commerce firms who have FDI support. Those without FDI are free to do as they please. For instance, companies like Flipkart, Amazon and Snapdeal will feel the pinch of price-influencing norms, whereas, big households like Reliance Group, Tata Sons, Aditya Birla Group and many more who have entered the e-commerce avenue or have plans to do so will continue fishing out discounts.
Offline traders are suffering due to some clauses and want FDI norms to be strictly enforced on the e-commerce sector.
Major online discounts and the luxury of having FDIs given to e-commerce retailers were slowly killing offline traders. This new law does have a positive outcome and is bound to turn the tables, stabilize the markets and operate through a margin that will not hamper growth for any domain.
About The Author: Vipul Maheshwari has been practicing since 1992 in various arenas of law with specialization in Corporate Laws, Joint Ventures & Strategic Alliance, Capital Markets, Merger & Acquisitions and Corporate Restructuring.
He has been advising various foreign companies including the largest Company of architects, designers and engineers in Europe having its offices at UK, Ireland, Netherlands and UAE, in establishing their business into India. He has also advised a US-based pilot training institute to establish their branch in India He has also advised on various aspects of Acquisition and Business Establishment to the major diversified manufacturing Company of USA with operations in five product segments for an acquisition in India.
The views and ideas expressed in this article are his own
