Indian E-commerce is structured to operate as marketplace model, but there’s more than what meets the eye

Most e-commerce players, if not all of them, function as inventory-based models, with smoke and mirrors to disguise the actual structure.

E-commerce: Easing the messed-up rules
E-commerce: Easing the messed-up rules

Given that the mega Walmart-Flipkart deal had barely closed when the 7-million-strong traders association, along with a political faction, petitioned the NCLAT to scrap the deal—going to the extent of even questioning the veracity of how the CCI approved the deal in the first place—there are more questions than answers when it comes to new channels of business, and e-commerce in particular. To add insult to injury, the traders’ body has petitioned the Delhi High Court to investigate the structure of Flipkart, alleging serious violations by it of the FDI law on e-commerce.

And it hasn’t ended here; an ill-timed remark from the secretary of the DIPP, which happens to be the nodal body approving FDI investment, has set the cat among the pigeons. The secretary has gone on record saying that the government won’t allow FDI in inventory-based e-commerce. Understandably, this remark has been controversial and can even be mistaken to be politically-motivated. Although not expressing any views on the remark, the real issue is that the government should get very serious on this subject. It did try to address all issues and challenges with its recently-released (and then quickly withdrawn) e-commerce policy, which appeared to have favoured home-grown e-commerce companies over their foreign counterparts.

To illustrate, let’s take a few proposals of this draft policy. The policy proposed to create a separate wing in the Directorate of Enforcement to strengthen the enforcement of Press Note 3 of 2016. To refresh readers’ memory, this is the press note that details the rules with regard to marketplace e-commerce and bans inventory-based e-commerce. The policy proposed opening up of inventory-based e-commerce up to 49% FDI, provided the goods sold online are 100% made in India. To ease raising of funds domestically (instead of raising through FDI), the policy proposed to shorten the mandatory three-year lock-in on promoters’ shares when a company goes to IPO. There are other proposals that suggest favourable provisions to suit swadeshi over foreign capital. E-commerce players may be structured to operate as marketplace model, but that is merely cosmetic. Most, if not all of them, actually function as inventory-based models, with smoke and mirrors to disguise the actual structures.

The semantics of determining which company is eligible for FDI or otherwise is banned from receiving FDI hinges on a single technicality—who owns the goods when the sale is made. If the FDI-funded company owns them, it qualifies as inventory-based mode and online trade is not permitted. If the FDI-funded company does not own them but acts only as a facilitator of sale on its online platform, the trade is allowed. This distinction is, of course, merely theoretical. A closer look at the creative structures will reveal that, in reality, they generally operate as inventory-based models. For example, when one shops online (say, buying a book), the invoice receipt shows online company’s name and logo (as if this is, in fact, the seller of the goods!), but the fine print will indicate another entity as the actual seller. The selling entity is mostly a company that is either the company’s promoted entity or its preferred entity. This is what the trade body is accusing FDI-funded companies of, i.e. foul play. So, the truth is that these companies have smartly found ways to legally structure the investment and technically follow the FDI law.

It is simpler and better for business if the e-commerce sector is just liberalised instead of confusing and messing-up the whole issue for no real long-term benefit to anyone. If the restrictive confusion continues, it will more likely than not drive away investment from the sector, right in the midst of when retail global giants are just getting started with their expansion plans. The government needs to look at the bigger picture and not appease protectionist forces, like the trader communities. The reality is that everyone, including the traders, will benefit if this were to be so. It’s time the government wakes up and smells the coffee.

The author is a Partner, J Sagar Associates. (Views are personal)

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