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  1. Foreign investment in ecommerce: New guidelines give clarity but leave room for misuse in name of smart-structuring

Foreign investment in ecommerce: New guidelines give clarity but leave room for misuse in name of smart-structuring

The new guidelines leave room for misuse in the name of smart-structuring

By: and | Updated: May 13, 2016 9:24 AM
The guidelines define e-commerce as the buying and selling of goods and services, including digital products, over digital and electronic networks. The guidelines define e-commerce as the buying and selling of goods and services, including digital products, over digital and electronic networks.

The department of industrial policy and promotion (DIPP) recently announced a new set of guidelines governing foreign investment in e-commerce. This was long awaited in a sector which has until now been the centre of controversies, especially with the size of foreign capital it has attracted. The guidelines provide clarity on regulation of inventory-based and marketplace models of e-commerce. While this clarity is welcome, few provisions in the guidelines open up a chain of confusion and conflicting thoughts.

The guidelines define e-commerce as the buying and selling of goods and services, including digital products, over digital and electronic networks.

If this is, in essence what an e-commerce company does, then it may also bring into its fold taxi aggregators like Ola and Uber and online ticketing and hotel reservation service providers, etc. Though the press-note permits sale of services through e-commerce under the automatic route, a clarification from the DIPP will be welcome, given that the larger definition of e-commerce includes both goods and services.

The guidelines say that a marketplace player cannot source more than 25% of products or services from a single vendor, including its group entities. This has a direct impact on many e-commerce giants, considering the fact that they source majority of their inventory from a single vendor. An interesting point, open to interpretation, here is how is the 25% cap measured—whether in value or volume terms. Also, what is the time period over which this has to be measured and how is this to be monitored?

The guidelines provide that a marketplace player cannot influence the price of a product or service being sold. How does one define ‘influence’? In the absence of a definition, this is open to interpretation. One could look at situations where vendors, out of business imperatives, sell at significantly different prices on offline and online platforms. However, does the same defence hold good when prices of the same vendor are significantly different across various marketplaces?

The e-commerce giants owe their growth to the huge discounts they offer to end-consumers. While the argument may be that this practice is creating an unfair price advantage over brick-and-mortar stores, one cannot ignore the fact that this is the primary driver behind the growth of e-tailing in India. With the guidelines kicking in, it will be interesting to see the manner in which the e-commerce companies fund discounts. Currently, many e-commerce players fund this in the form of reimbursement of promotional expenses. If this practice continues, one can allege influence over pricing. Clearly, there is a need to evolve alternate pricing models. The market may increasingly move towards a cash-back model. Also, we might see a shift towards offering flash discount sales through group entities.

Furthermore, the guidelines provide that the marketplace players can enter into B2B transactions with the vendors. While B2B e-commerce was allowed earlier also, this throws up some possibilities, which may be completely divergent with the thought behind this policy. A marketplace entity with FDI is not permitted to own inventory and undertake B2C sales. However, one could still assume the inventory-holding risk, yet remain compliant with this policy. Given the clear restriction on an inventory-based B2C model of e-commerce, this scenario may not be what is intended by this policy. Coupled with the restrictions and conditions associated with FDI in multi-brand retail, the B2B relaxation under the new guidelines merits more thought and perhaps, a formal clarification.

The policy allows a single-brand retailer, operating through physical formats, to sell online as a B2C transaction, which is otherwise prohibited. Since there is no stated guideline on the proportion of offline sales and the number of stores, this could lead to misuse of provisions.

While the new press-note is indeed a very positive development, clarity on certain highlighted points would be essential for the sector to prevent misuse in the name of smart-structuring. With the kind of attention this sector enjoys from all spheres and the government’s focus on providing more clarity on doing business, it may not be long before we see a version 1.1 of these guidelines.

Vaibhav is associate partner and Samudra is director at Dhruva Advisors LLP. Views are personal

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