India allows 100% FDI in e-commerce marketplace model

The Indian government has permitted 100-per cent foreign direct investment (FDI) in the market place format of e-commerce retailing in order to attract more foreign investments. The government, however, made it clear that FDI was not permitted in the “inventory based” model of e-commerce, implying companies that receive FDI cannot buy and store goods from various vendors to eventually sell to consumers. The new policy underlines clearly that marketplaces cannot source more than 25 per cent of its goods by value from a single vendor. The new policy also restricts e-commerce companies from directly or indirectly influencing the sale price of goods on online marketplaces, which is likely to affect Indian online firms. E-commerce firms like Amazon India and Flipkart have already built ‘special relationships’ with certain vendors, who account for large chunks of the sales on their sites.

However, IT industry body Nasscom termed 25% cap on sales from a single vendor or group entities as “restrictive”. “…more so if the vendor sells high value items. The industry might face difficulties in case of sale of electronic items, where a vendor maybe offering exclusive access to certain items or discounts. Marketplaces have no control on how a product is priced and only organise ‘sales’ where vendors participate,” Nasscom said in a statement.

Level-playing field

“They will now not only stop giving huge discounts but also perhaps not advertise openly about big sale days. This will call for change of business model,” said Kishore Biyani, CEO of Future Group that runs the country’s largest brick-and-mortar retail company.

Global companies Amazon and E-Bay presently own and run online marketplaces in India without local partners while home-sprung majors like Flipkart have raised billions of dollars from foreign investors. The new policies offer is clarity – and considerable comfort – for e-commerce after traditional shopkeepers have in court accused online retailers of violating foreign investment rules. The Retailers Association of India has already filed a petition before the Delhi High Court saying that e-commerce players are behaving more like retailers offering heavy discounts and unnerving the level-playing field. In its response, the court had asked the government to clarify the clauses in the FDI policy in respect to e-commerce.

As a matter of fact, e-commerce giants like Flipkart and Snapdeal can now be owned entirely by foreign firms. However, Snapdeal founder Kunal Bahl tweeted: “Great to see the guidelines around 100% FDI in ecomm marketplaces. Glad the govt recognises and supports an industry transforming India!” In order to bring clarity, the Department of Industrial Policy and Promotion (DIPP) has also come out with the definition of ‘e-commerce’, ‘inventory-based model’ and ‘marketplace model’. The 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 consumers directly, according to the guidelines.

Mixed Reaction

“With the clarity in policy and given the potential of Indian market, this policy initiative will certainly attract more FDI into the country. Enabling the marketplace operator to provide value add services like warehousing, delivery, payment processing etc will improve customer experience and market outreach for small and medium size suppliers,” PwC Partner and Leader Regulatory Akash Gupt said.

“The clarity of the definition of e-commerce and marketplace model categorically will allow many players (national and international) to enter the industry through marketplace route,” ShopClues CEO and co-founder Sanjay Sethi said.

“Although, some of the structures practised by existing players may require alteration but it will give much needed clarity to undertake business with certainty in longer term,” Amarjeet Singh, Partner (Tax) at KPMG India said.

“I expect few more global e-commerce players now finalising their India entry plans. There were lot of concerns on FDI which have now been addressed,” Paresh Parekh of EY has said.

“The move will usher in considerable investments and will immensely benefit the consumers and the small and medium industries, and will also open up avenues for employment generation. We hope that going forward, the government will also allow 100% FDI in inventory-based B2C e-commerce activities,” IAMAI President Subho Ray said.

“An e-commerce firm will also not be permitted to sell more than 25% of total sales from one vendor or its group companies which ensure e-commerce company to operate as true marketplace. The definitions in the notification will prevent marketplaces from behaving like pseudo retailers,” Retailers Association of India (RAI) said in a statement.

Almost all Indian e-commerce companies including Flipkart, Snapdeal, Jabong and Shopclues, are funded by foreign capital. All these online firms are owned by international investors in terms of share they own.

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