While the government on Tuesday clarified its stance on foreign direct investment (FDI) in e-commerce, saying 100% foreign ownership would be permitted for a marketplace model via the automatic route, the rider that they cannot “directly or indirectly influence the sale price of goods or services” may take the sheen off the legal sanction. The government also clarified that single-brand retailers can sell via the e-commerce route but barred foreign ownership in an inventory-based model.
Indeed, brick-and-mortar players, who have been clamouring for a level playing field, are interpreting the condition as being restrictive for e-retailers. “From what we understand, e-commerce players can’t offer discounts anymore or advertise since they are merely a technology platform,” Kishore Biyani, chairman, Future Group, told FE. Biyani believes the rules could be a game changer. “They cannot solicit customers so that puts us on an even footing,” he said.
While the notification from the department of industrial policy and promotion says the e-commerce player “shall maintain a level playing field”, it is not clear with whom this is to be maintained. The guidelines restrict sales by a single vendor to 25% of the total sales made by the marketplace. This rule could impact Cloudtail India, a joint venture between Amazon and Narayana Murthy’s Catamaran Ventures, currently the largest seller for the Indian e-commerce unit of Amazon, and WS Retail, the largest vendor for Flipkart.
Moreover, while e-commerce marketplaces are allowed to provide support services to sellers “ in respect of warehousing, logistics…and other services”, it is not clear whether these include advertising services and exclusive campaigns. Typically, e-retailers take on the advertising costs. However, players such as Amazon and Flipkart, which encountered problems with their warehousing facilities, initially prompting them to restructure the units as separate ventures, stand to benefit from the new rules.
Vivek Gupta, partner, BMR Advisors, summed up the press note for what it was. “This is an explicit position long overdue but all it does is bless existing structures,” Gupta said, pointing out the government had recognised that the marketplace model of retailing was not not retailing per se and so will not be subject to restrictions that single brand trading is subject to.
Despite the riders, incumbents welcomed the policy, probably because there is now legal sanctity and investments do not need to be channelled into the country via a maze of entities.
“Great to see the guidelines around 100% FDI in e-commerce marketplaces. Glad the government recognises and supports an industry transforming India!” Snapdeal CEO Kunal Bahl tweeted.
Shopclues founder Sandeep Aggarwal said, “Online marketplaces are neither e-commerce companies nor retail companies, but technology and services platforms. The clarity will help more companies to adopt the marketplace route in India and will remove a regulatory risk.”
Interestingly, the government remains steadfast on its decision to disallow FDI in multi-brand retail — although it has not rewritten the rules put in place by the UPA government that had permitted a 51% foreign stake. Industry experts say the government had little choice given e-commerce players that have been operating for several years now are backed by foreign investors, whether private equity firms or e-commerce players like Alibaba, and have attracted billions of dollars. Amarjeet Singh, partner, tax, KPMG, said the clarity provided by the government would help facilitate foreign investment into the sector.