March 30th, 2016
Government on Tuesday allowed 100 per cent foreign direct investment (FDI) in e-commerce marketplaces through automatic route. This will facilitate foreign investments in e-commerce in India, which already constitutes a big chunk of net FDI in last two years.
The notification defined the term ‘e-commerce’ which was hitherto undefined:
E-commerce: It means buying and selling of goods and services, including digital products over digital and electronic network.
E-commerce business operates on two models:
- Marketplace model: It means providing of an IT platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. (E.g. Flipkart, Snapdeal, ShopClues, Paytm, Amazon in India).
- Inventory-based model: It means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to consumers directly (E.g. Amazon in USA)
FDI is permitted only in the marketplace model and not the inventory-based model of e-commerce.
How was e-commerce sector till now?
FDI was not allowed in e-commerce till now. Companies used to exploit the grey area to attract foreign investments. Online marketplace platforms (Amazon India, Flipkart, Snapdeal, etc) were described as technology enablers rather than e-retailers. They claimed to have no inventory of their own. That kept them going even with a ban on FDI in e-commerce.
The notification provided some vital guidelines for regulation of the sector, which will have definite impact on the stakeholders involved:
Vendor stake cap
Rule: “An e-commerce firm will not be permitted to sell more than 25 per cent of the sales affected through its market place from one vendor or their group companies.”
How: Flipkart’s largest seller WS Retail Services Pvt. Ltd easily generates more than 25% of the company’s sales while Cloudtail India Pvt. Ltd, the biggest seller on Amazon India, contributes even more.
Effect: This cap will ensure a broad base of vendors for a true marketplace.
Near end of Deep Discounting
Rule: “E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field”
How: Amazon funds discounts by sellers indirectly through a route it calls “promotional funding”. This it how it works: Amazon recommends the amount of discounts to its sellers on products, but doesn’t force them to adopt these prices. Sellers, however, go along as Amazon finances the discounts.
Effect: This will level the playing field with offline (brick-and-mortar) stores, which have witnessed a slump in footfalls corresponding to the increase in e-commerce. However, this could potentially end the discount wars, much to the disappointment of consumers.
Relief to the players
Definition of marketplace also includes support services to sellers with respect to warehousing, logistics, order fulfillment, call centre and payment collection.
- Marketplace players or their group companies cannot sell
- Guarantee and warranty must be the sole responsibilities of the sellers
- E-commerce companies to display contact details of the sellers online
- A seller may sell goods at a discount, but marketplaces cannot fund discounts through bonus schemes, marketing cost reimbursement, etc.
The responses from the stakeholders have been mixed. While some hail the new rules for making bringing hopes to the dying traders and brick-and-mortar retails, some others are skeptic of possible entry of large foreign companies. The ramifications of the rules especially the MSMEs will surely impact the long term future of various initiatives of the government, especially ‘Make in India’
The Logical Indian hopes that the new rules should bring MSMEs and small traders in the forefront, both online and offline, so that the boom in the sector trickles down effectively