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New Guidelines for FDI on E-commerce: Its Impact on the E-commerce Companies

New Guidelines for FDI on E-commerce:
Its Impact on the E-commerce Companies
Dr. S. Shyam Prasad
With the onset of LPG,
India has seen a rise in the flow of FDI in to the country. Though this
phenomenon is good for the economy, unbridled inflow is not without danger.
Being aware of this menace, the government has laid down the conditions for its
flow inwards. While the government has permitted 100% FDI in many sectors and it
has prescribed some restrictions in certain other sectors. Retail is one such
area where there are quite a few restrictions.
While FDI up to 100%
under automatic route is permitted in Business to Business (B2B) e-commerce, no
FDI is permitted in Business to Consumer (B2C) except in following
manufacturer is permitted to sell its products manufactured in India through
e-commerce retail.
ii)      A single brand retail trading entity
operating through brick and mortar stores, is permitted to undertake retail
trading through e-commerce.
iii)    An Indian manufacturer is permitted
to sell its own single brand products through e-commerce retail. Indian
manufacturer would be the investee company, which is the owner of the Indian brand
and which manufactures in India, in terms of value, at least 70% of its
products in house, and sources, at most 30% from Indian manufacturers.
The New Guidelines
The new guidelines
became necessary because in the guise of e-commerce many players have been
accessing FDI funds while behaving like quasi retailers. This has altered the
playing field in favour of the e-commerce companies. The note issued by Department
of  Industrial Promotion and Policy
(DIPP) has also clearly defined certain terms in order to remove any ambiguity
while dealing with this matter. The definitions are reproduced below:
E-commerce: E-commerce means buying and selling
of goods and services including digital products over digital & electronic
ii)      E-commerce entity: E-commerce entity means a company incorporated under the Companies Act
1956 or the Companies Act 2013 or a foreign company covered under section 2(42)
of the Companies Act, 2013 or an office, branch or agency in India as provided
in section 2 (v) (iii) of FEMA 1999, owned or controlled by a person resident
outside India and conducting the e-commerce business.
iii)    Inventory based model of e-commerce: Inventory based model of e-commerce means an
e-commerce activity where inventory of goods and services is owned by e-commerce
entity and is sold to the consumers directly.
iv)    Marketplace based model of e-commerce: Marketplace based model of e-commerce means providing
of an information technology platform by an e-commerce entity on a digital
& electronic network to act a s a facilitator between buyer and seller.
The above clarification
along with the new guidelines, the retailers unanimously believe, would create
a level playing field.
Among the ten conditions
laid down, the two important that would impact the players, are
a)      the condition that “an e-commerce
entity will not permit more than 25% of the sales affected through its
marketplace from one vendor or their groups companies” and
b)      E-commerce entities providing
marketplace will not directly or indirectly influence the sale price of goods
or services and shall maintain level playing field.
The Fall-out
The fall-outs of these
guidelines are very clear. The first consequence is that it has clamped down on
discounts and predatory pricing. One may not expect to see “big-billion sales”
etc., in future because of the condition b) above.
No FDI in B2C
ecommerce means that Amazon or foreign-funded players such as Flipkart cannot
operate under an inventory-led model. In effect, these companies could not
simply buy merchandise from various wholesalers, stock them in their warehouses
and sell them on their website. In the marketplace model, these companies can
act as an intermediary for sellers and buyers. These entities don’t own
The old marketplace
model allowed the company to sidestep regulatory hurdles that prevent foreign
retailers from owning an Indian arm for direct sales. In old marketplace model,
e-commerce entity could not own any merchandise sold but act as platform for
any retailer who wishes to sell his products. However, the problem here is the
quality of service, shopping, delivery and overall customer satisfaction which
tends to be low. Cleverly, to circumvent this problem, Flipkart and Amazon
established a ‘primary seller’ each. WS Retail Services and Cloudtail India Pvt.,
Ltd., for Flipkart and Amazon respectively contributing more than 25% of their
sales online. Both these organizations can be traced back to Flipkart and
Amazon respectively.
Now with the new
regulations in place, allowing 100% FDI in e-commerce marketplace, with a rider
that “no one vendor on the marketplace should be allowed to contribute more
than 25% of the company’s overall sales” Cloudtail and WS Retail Services will
have to reduce their contributions and allow a more level-playing field to
India’s traditional retailers.
In contrast, Snapdeal,
since 2012, continued on the marketplace model and did not resort to measures
such as propping up a primary seller.  Though
it lagged behind the competitors, it did it with less capital. Consequently,
the new 25% seller rule will not affect it as much as Flipkart and Amazon.
Kumar Rajagopalan,
CEO, Retailers Association of India (RAI) while welcoming the new guidelines
said, “The note is testimony to the fact that the government  wants 
to  ensure  a 
level  playing  field 
for  all  channels. The move received much appreciation
from all members of RAI”.
The All India Online
Vendors Association also, in a statement welcomed the new guidelines and said
that the new 25% rule will allow online retail companies to widen their seller
Retailers  were 
positive  that,  if  enforced,  the 
policy  will  in 
fact  foster  a 
new  environment  of collaboration  between 
retailers  and  marketplaces 
that  would  ensure 
customer  convenience  and delight.