Bad tidings: New FDI policy a googly for e-commerce players

By: | Updated: February 14, 2019 7:19 AM

The new policy introduces many changes that are likely to make doing business difficult for existing e-commerce players. Wrong to call it a mere reiteration of the earlier policy.

The new policy introduces many changes that are likely to make doing business difficult for existing e-commerce players. Wrong to call it a mere reiteration of the earlier policy.

While the government announced its rejigged FDI policy for e-commerce recently, the e-commerce space in the country itself is set for an upheaval after Reliance’s announcement of entering the space. The government announced its reworked FDI policy on e-commerce through Press Note (2) in the last week of December 2018, and issued a clarification in the first week of January 2019. According to the clarification, the government has only reiterated the policy provisions to ensure better implementation of the policy in letter and spirit. A careful evaluation, however, reveals that the policy provisions prescribed go much beyond reiteration of the policy and substantially change the FDI policy on e-commerce in India.

The Press Note states that the provisions of the policy will take effect from February 1, 2019. If this Note is only a reiteration of the earlier policy, there should not be any need for specifying a future date for the policy taking effect. On the other hand, if there are provisions that were not there earlier but marketplace entities are now required to meet, it is definitely no mere “reiteration of the earlier policy”.

As compared to the earlier policy enumerated in Press Note (3) of 2016, the new Press Note places new obligations on marketplace entities. First, e-commerce marketplaces or other entities in which e-commerce marketplaces have direct or indirect equity participation or common control should provide services (such as fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing etc.) to vendors on the platform at arm’s length and in a fair and non-discriminatory manner. Second, cash-back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. Third, an e-commerce marketplace will not mandate any seller to sell any product exclusively on its platform only. Fourth, the e-commerce marketplace will be required to furnish a certificate along with a report of statutory auditor to Reserve Bank of India by September 30 every year for the preceding financial year.

The new policy also specifies criteria (not there in earlier policy) for defining inventory of vendors as the inventory of marketplace entity. The inventory of a vendor will be deemed to be controlled by e-commerce marketplace if more than 25% of purchases of such vendor are from the marketplace entity or its group companies. It puts the liability of conforming to this provision on the marketplace entity through RBI audit. There will be a number of implementation problems in ensuring this provision. First, how does a marketplace assess whether more than 25% of purchases of a vendor are from the marketplace or its group companies? Even if this is included as a contract condition by the market place with its vendors, what if the vendor changes its name and purchases the same goods under a different name? Who will audit the vendors? Is it RBI’s or the marketplace entity’s responsibility to certify if vendors are fulfilling this condition or not? RBI audit seems to be only for the marketplace entity and not for vendors.

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The earlier policy required that an e-commerce entity will not permit more than 25% of the sales effected through its marketplace from one vendor or the latter’s group companies. The new policy does not have any such provision. It is not clear whether this condition is now withdrawn or is still applicable to marketplace entities. If withdrawn, it reflects a major change with respect to the applicability of the group company obligations. Earlier, group company obligation was applicable for vendors, but now it is applicable to marketplace entities.

A misunderstanding the new policy creates is with regard to ownership or control of inventory. On the one hand, the Press Note says that e-commerce entities providing a marketplace will not exercise ownership or control over the inventory. On the other, the clarification to this Note specifies that the present policy does not impose any restriction on the nature of products which can be sold on the marketplace. This would imply that the present policy does not prevent selling of private labels. By their nature, private labels are owned by the entities. Thus, it implies that inventory ownership in the form of private labels is allowed. It would have been better if there were clarifications forthcoming on these implications.

Another potential area of confusion is with respect to cash-back provided on e-commerce platforms. The policy requires that cash-back provided by group companies of marketplace entities to buyers shall be fair and non-discriminatory. What about cash-back provided by the marketplace entity itself and not by its group companies? Does fair and non-discriminatory clause not apply to such cash-backs?

The government specifies that, in the marketplace model, goods/services made available for sale electronically on website should clearly provide the name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction will be responsibility of the seller. What about services? Since this specifies satisfaction only with respect to goods, does that mean any dissatisfaction with regard to post-sale delivery of services will not be responsibility of seller?

The policy guidelines, as enumerated in Press Note (2), and the subsequent clarification are intended to prevent violation of the FDI policy on e-commerce and any circumvention of restrictions on multi-brand retail trading. Though, it tried to plug the gaps remaining in the earlier policy, it has ended up creating new difficulties for various stakeholders. Given the substantial changes in the current policy, it would have been better if the government avoided calling it a reiteration of the earlier policy and called it a revised policy on FDI in e-commerce instead. It should also have consulted various stakeholders, including foreign players, before changing the policy. Since these players are allowed to do business in India by the government itself, they should have been given an opportunity to be heard. It is a different matter what policy options government would have chosen after consultations, considering the overall benefits to the economy, as the -government has the right to change its policy stance, given how e-commerce is evolving in India. This is why India must resist attempts at the WTO to have binding rules on e-commerce as they take away the flexibility from the government to change policy stance, if situation warrants so in future.

(Associate professor, Centre for WTO Studies, IIFT, pralok@iift.edu Views are personal)

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