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  1. E-commerce: No plan for FDI in inventory model

E-commerce: No plan for FDI in inventory model

The government has no plan to dilute its foreign direct investment (FDI) policy for e-commerce and allow online marketplaces to hold inventory of goods sold on their platforms, a top official told FE.

By: | New Delhi | Published: July 11, 2018 6:08 AM
Ecommerce, FDI policy, retail FDI policy,  Amazon Food Retail , FDI regime, fdi inflows Reports recently suggested that an industry-government subgroup on e-commerce has recommended that FDI be allowed in online retailers for stocking products manufactured in India.

The government has no plan to dilute its foreign direct investment (FDI) policy for e-commerce and allow online marketplaces to hold inventory of goods sold on their platforms, a top official told FE. It doesn’t intend to alter the overall retail FDI policy, either. There has been mounting speculation that the gaovernment might heed suggestions by some industry players to permit FDI in the inventory-based model of e-commerce, enabling e-tailers like Amazon or Flipkart to stock goods. Reports recently suggested that an industry-government subgroup on e-commerce has recommended that FDI be allowed in online retailers for stocking products manufactured in India.

“The policy on e-commerce is clear — 100% FDI is allowed in the marketplace model via automatic route but no FDI is allowed in the inventory-based model. There is absolutely no such proposal to tweak the existing policy,” said the official.
As for retail policy governing brick-and-mortar stores, while 100% FDI is allowed in single-brand retailing through the automatic route, in multi-brand retailing, up to 51% of FDI is permitted, subject to government approval.

Only in the trading — including through e-commerce — of locally produced food products, is up to 100% FDI allowed with government permission. Although Amazon has also got approval to set up its offline retail outlets for food items as well, as per rules, it is mandated to keep its food retailing separate from other ventures. In a recent communication to FE, an Amazon spokesperson said: “We have launched Amazon Food Retail and are committed to expand to more cities.”

Another source added: “If e-tailers like Amazon are allowed to hold inventory of all locally produced items under the FDI policy, why would they set up offline stores for only food products where margins are not so good? Any such policy relaxation will make the FDI policy in food retail unattractive.”

Offline traders have already warned that they will step up agitations against this kind of policy relaxation. As such, they have been alleging that e-tailors also hold inventory, thus violating the FDI policy. The department of industrial policy and promotion also clarified last month that food retailers that have foreign investments will need to keep accounts and invoices separate from those of their other businesses. However, such retailers can use the warehousing facility meant for other businesses to store food products as long as such edible items are “kept physically separated and readily distinguishable from inventory for any other business of the investee company”.

The move would enable companies like Amazon that have already invested heavily in setting up warehouses, logistics and transportation facilities for their online marketplace models in India to utilise some of these resources for their food retail venture, while maintaining an arm’s length distance.

In July 2017, the government had cleared a proposal by Amazon to invest around $515 million in retailing food products manufactured in India. Later, BigBasket and Grofers also got approval to invest $155 million and $25 million, respectively, in food retailing.

The government earlier rejected a proposal by the food processing ministry to relax the FDI rules for food retail to allow certain related items such as kitchenware and beauty products, along with the edible goods, to better attract foreign investors.

The Narendra Modi government has already announced two big rounds of relaxations in the FDI regime, first in November 2015 and then in June 2016, easing rules in over a dozen sectors ranging from real estate, pharmaceuticals, food marketing, aviation and defence to e-commerce and banking. For the past three years, gross FDI inflows into the country have been hitting fresh highs — they touched a record $62 billion in 2017-18. However, the growth in such inflows slowed to a five-year low last fiscal, partly due to a high base.

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