The problem lies in the government de facto shutting the door for FDI in multibrand offline retail.
The department of industrial policy and promotion (DIPP)—the nodal authority for issues relating to foreign direct investment (FDI)—has notified guidelines for FDI in e-commerce. Under these, 100% FDI through the automatic route will be allowed in the ‘marketplace’ format of e-commerce retailing, but not in the ‘inventory-based’ model.
Under a marketplace model, an e-commerce entity provides an IT platform on a digital and electronic network to act as a facilitator between buyer and seller. The company may provide support services to sellers in terms of warehousing, logistics, order fulfillment, call centre, payment collection and other services.
Post-sales, delivery of goods to the customers and customer satisfaction will be the responsibility of the seller, including warranty/guarantee. The goods sold on the e-commerce company’s website should clearly provide name, address and other contact details of the seller.
Such entities will not exercise ownership over the inventory which will render the business as inventory based model where an e-commerce entity owns the inventory of goods and services and sells them directly to consumers (B2C).
However, permission is subject to certain riders. An e-commerce firm cannot have more than 25% of its total sales from one vendor or its group companies. It will not directly or indirectly influence the sale price of goods or services and must maintain a level playing field.
A marketplace entity will be permitted to enter into transactions with sellers registered on its platform on business-to-business(B2B) basis. This is a reiteration of extant policy which permits 100% FDI in B2B transactions in e-commerce.
The guidelines are intended to regulate FDI in e-commerce and create a level playing field vis-a-vis companies in the offline multi-brand retail (MBR) space. For the latter, under existing policy, 51% FDI is allowed subject to riders such as 30% sourcing from small enterprises, minimum investment of $100 million, prior approval by states, etc. This is as good as complete prohibition.
Considering that under ‘inventory-based’ model-e-commerce counterpart of MBR in offline segment-FDI will not be permitted, one gets an impression that the objective has been achieved. But, on closer look, it turns out that the government has merely done some window dressing. Indeed, this gets reflected in the manner in which it defines the marketplace model.
A marketplace is intended to capture support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services. If, all sales related functions are performed by so called “facilitator”/e-commerce entity—pertinently, “other services” will subsume any other crucial activity not mentioned here—then, what the seller who supposedly owns the stock is expected to do?
In essence, the “inventory-based” category where FDI is prohibited—as per the new guidelines—would almost become redundant and all FDI that flows in to B2C will pass muster under marketplace. This is nothing short of skulduggery to legitimise all that is already happening.
All big companies viz., Flipkart, Snapdeal, Amazon, etc, have the logistics-wherewithal for timely delivery of goods and handling after-sale services. They not only keep an eye on availability of all sought after goods, their sources/points of supply, contractual agreements but also keep sufficient stocks in their own store houses. They are very well positioned and adequately equipped to initiate and successfully consummate a sales transaction.
Yet, to give an impression that they are not sellers, they employ all sorts of documentation techniques . Thus, the e-company goads a seller to raise invoice even as it continues to handle entire sale transaction. This way, it leaves an impression that it does not own the goods and therefore, will not be deemed a retailer.
The guidelines will allow them to continue in a ‘business as usual’ mode as merely asking for address/contact details of seller or requiring him to give after-sale service or ensure customer satisfaction are hardly any deterrent. Warranty/guarantee of goods and services is in any case the responsibility of the manufacturer.
In short, nothing has changed except that what could be perceived as illegal under earlier dispensation, the guidelines have made it legal. Plus, it has given bureaucrats a lot of room to exercise discretion. They will decide classification of an activity viz., marketplace or inventory based. Other riders such as 25% threshold or no discounts will unnecessarily invite displeasure of even those (Flipkart, Amazon et al) whom government is trying to please.
The government should play with a straight bat. The genesis of the problem lies in its de facto shutting the door to FDI in MBR. Unnecessary distinctions/classifications such as ‘single-brand’ and ‘multi-brand’—a practice unique to India—have further complicated matters. All over the world, retail is treated as ‘retail’ without any differentiation. Why can’t we follow this practice? Why can’t government allow 100% FDI in MBR, already permitted in single-brand? Why can’t it put in place a uniform policy dispensation?
Once the anomaly with regard to foreign investment in physical segment is removed, the government will have no hitch in letting 100% FDI in e-commerce retail or B2C as well (it does not need to indulge in trickery). With this, both retailers and e-tailers will be on a level playing field and can proactively engage in an open and transparent manner with foreign investors.
The government will end up providing a “stable” and “attractive” policy environment. Apart from funds already received, there will be unprecedented scope for more FDI. An added bonus will be by way of brick-and-mortar companies withdrawing pending cases in court (under the guidelines, discrimination persists; hence cases won’t be withdrawn).
Will Modi crack the whip to bring about these drastic policy changes instead of remaining stuck in grooves, courtesy the BJP’s intransigence on FDI in MBR?
The author is a policy analyst