Inventory model: E-commerce FDI rules may be eased

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New Delhi | Published: July 31, 2018 5:42 AM

The FDI rules for e-commerce segment may see considerable easing but it could be accompanied by an institutionalised regime of oversight to safeguard the interests of domestic brick-and-mortar stores and consumers at large.

Inventory model: E-commerce FDI rules may be eased

The foreign direct investment (FDI) rules for e-commerce segment may see considerable easing but it could be accompanied by an institutionalised regime of oversight to safeguard the interests of domestic brick-and-mortar stores and consumers at large.

A watchdog will be set up to regulate the e-commerce sector, including the alleged abuse of FDI rules through hefty discounts by e-tailers like Amazon and Flipkart, among others, if suggestions by various industry-government working groups on e-commerce are endorsed by the Centre. Foreign e-commerce firms operating in India could even be asked to store consumer data locally within two years.

Importantly, one of the working groups has suggested that the FDI rules be eased by allowing e-commerce marketplaces to hold inventory of locally-produced items. However, in such a case, the founder/promoter of the e-commerce player will have to be a resident Indian, with its management controlled by Indians, and foreign equity would not exceed 49%.

Currently, it’s allowed only in case of domestic food items. However, this suggestion was not considered at length on Monday by a think tank headed by commerce and industry minister Suresh Prabhu, given the sensitivity of the matter and fierce opposition by brick-and-mortar stores, said a government official.

Commerce secretary-designate Anup Wadhawan said the think tank on Monday deliberated upon the suggestions by various working groups, comprising industry and some government officials, and a final draft policy will be put out in due course. The think tank will hold further consultations with stakeholders if required, he added.

As per suggestions of the working groups, a separate wing in the Directorate of Enforcement will be set up to handle grievances related to implementation of FDI rules. While the extant FDI policy bars e-tailers from giving discounts themselves, brick-and-mortar stores have often accused these e-commerce players of flouting the rules, citing inadequate oversight of the implementation of the policy. For their part, Amazon and Flipkart — just like other e-commerce players — claim that they have always complied with the rules and that the discounts are offered by the sellers of the goods on their platform, and not themselves.

The working groups on e-commerce sought to make this restriction even more explicit.

It suggested restriction be imposed on e-commerce marketplaces to not directly or indirectly influence the price of sale of goods and services and that this curb will be extended to group companies of the e-commerce marketplace.

The working groups have suggested that bulk purchase of branded goods such as electronic products (especially mobile phones), white goods and branded fashion products by related-party sellers which lead to price distortions in a market place would be prohibited.

A sunset clause, which defines the maximum duration of differential pricing strategies (such as deep discounts) that are implemented by e-commerce platforms to attract consumers would be introduced.

Currently, while the department of industrial policy and promotion (DIPP) formulates and notifies FDI policies, including those on e-commerce, any violation of such rules is dealt under the penal provisions of the Foreign Exchange Management Act (FEMA). This Act is administered by the Reserve Bank of India and is enforced by the enforcement authority.

At present, the government allows up to 100% FDI in e-commerce marketplaces via automatic route but no FDI is allowed in the inventory-based model (barring food retail). Only in the retailing of locally-produced food products — both online and offline — is up to 100% FDI allowed, with government approval.

Another suggestion mandates that home-grown card network RuPay — owned by 10 local and foreign banks — be included as a payment option for all online transactions. The move will enable RuPay to compete with global payment firms like Visa and MasterCard.

Recently, the $16-billion Walmart-Flipkart deal came under attack by the Confederation of All India Traders (CAIT) representing brick-and-mortar stores. CAIT has threatened to step up agitations, claiming “the deal is circumventing (FDI) laws” besides helping Walmart “to reach out to offline trade through e-commerce way”.

As for local storage of data, a two-year sunset clause will be provided to give international companies time to comply easily. Already, the Reserve Bank of India in April directed that all payment data be stored locally within six months for “unfettered supervisory access”.

The draft policy comes close on the heels of a proposal last week by the Srikrishna panel that suggests all critical personal data on people in India should be processed within the country.

The policy deliberations were hailed by Snapdeal but online vendors were not impressed. A Snapdeal spokesperson said: “This initiative… will lead to robust and orderly growth of this sector, catalysed by thoughtful and enabling regulation.”

However, All India Online Vendors Association spokesperson said, “Current issues being faced by sellers are completely left unaddressed. Violations of FDI policy will keep on happening as government is turning a blind eye. We will not allow a hybrid model of marketplace regardless of ownership structure. Either it has to be a 100% marketplace or 100% retailer.”

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