Via Press Note 2, the ministry of commerce and industry has added ambiguity to the existing policy on FDI in e-commerce.
While policymakers and courts are struggling with the lack of regulatory framework for permitting online sale of pharmaceuticals, the ministry of commerce and industry has added its share of ambiguity to the existing policy on FDI in e-commerce.
While the FDI policy does not permit FDI in inventory-based model of e-commerce, in Press Note 2 (2018 series), released December 26, the ministry has clarified, ironically, the inventory of a vendor will be deemed to be controlled by an e-commerce marketplace entity if over 25% of purchases of such vendor are from marketplace entity or group companies. The Note states: an entity (a) having equity participation by e-commerce marketplace entity or its group companies or (b) having control on its inventory by e-commerce marketplace or its group companies will not be permitted to sell its products on a platform by such marketplace entity.
A ‘group company’ is defined to mean two or more enterprises that, directly or indirectly, are in a position to (a) exercise 26% or more of voting rights in other enterprise or (b) appoint more than 50% of members of the board of directors in the other enterprise. E-commerce players have been trying to develop homegrown brands, as it offers them an opportunity to place and price such products strategically along with products of vendors. Given that now an entity that has equity participation by an e-commerce marketplace entity or its group companies cannot sell products on the platform run by such marketplace entity, it will be an uphill task to structure homegrown brands, and to unwind existing structures. The fact that the threshold is any equity participation (and not exercise of control) makes it more difficult to create a model suitable for investors.
When a vendor puts its products up for sale online, it has no control over what percentage of its products will be sold through such platform. So, to conclude that if more than 25% of products of a vendor are sold through the platform provided by a marketplace entity, then such entity is controlling the inventors is a far cry from logic. The FDI policy puts conditionalities on the marketplace entity having FDI, and not the vendors. Given that the marketplace model is based on the premise that marketplace entity has no control over inventory, it is self-contradictory to create a scenario where the marketplace entity has to ensure that no vendor sells more than 25% of its products through the platform provided by such entity. Also, given that marketplace entities have no way of monitoring sales of vendors, they will have limited or no recourse if such a condition is breached unintentionally.
The Note mandates that an e-commerce marketplace entity will not require any seller to sell any product exclusively on its platform. It is common for e-commerce entities to have exclusive tie-ups with brands for exclusive release of products on their platform. Whether a seller exclusively sells its products through one platform or multiple platforms has no impact on brick-and-mortar stores. Such tie-ups are unlikely to lead to monopolistic practices, given that most products sold on such platforms are substitutable. Even if such an arrangement was to have an adverse impact on competition, the CCI is there to examine such matters.
Lastly, the Note mandates that the e-commerce industry becomes compliant of such incremental restrictions no later than February 1, 2019. If an e-commerce player wants to hive-off a homegrown brand (and a range of products) that is manufactured by its subsidiary to comply with the Press Note, it would be virtually impossible to find a buyer and close the transaction in such a short period of time.
Restrictions on e-commerce are aimed at providing a level-playing field to brick-and-mortar stores. But restrictions are clearly a pyrrhic victory. If a retailer cannot sell more than 25% of its inventory through a marketplace platform, then it is a concern for the retailer, given that there are many retailers offering the same products, but not enough prominent platforms with a high number of users. As a result, the ability of a retailer to sell its products online gets curbed, but a platform will still have sufficient number of retailers offering the same range of products.
Given the length and breadth of restrictions on e-commerce, one wonders if regulators are barking up the wrong tree. Instead of adding further restrictions to e-commerce, it’s time to gradually liberalise the retail trading space.