Home Retail 100 pc FDI in ‘marketplace’ e-comm: Unanswered questions

100 pc FDI in ‘marketplace’ e-comm: Unanswered questions

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The big news emerging from the Government of India on Tuesday evening was that 100 per cent  is going to be allowed in “marketplace” e-commerce.

RBI administers FDI policy; ED enforcing authority: DIPP to CAIT
DIPP clarified that the FDI policy provides that an e-commerce marketplace will not directly or indirectly influence the sale price of goods and services (Image Courtesy: Sorbis / Shutterstock.com)

While the jury is not yet out on whether this is a much-needed welcome move or otherwise [i.e., not yet discovered through fine print], the initial reaction across the industry seems to be that of which side of the door you find yourselves at.

To put things in perspective, the Press Note from DIPP states: “up to 100 per cent FDI under automatic route is permitted in Business to Business [B2B] e-commerce. No FDI is permitted in Business to Consumer [B2C] e-commerce.” The Press Note goes on to further define what constitutes “e-commerce”, an “e-commerce entity”, and the difference between an “inventory-based model of e-commerce” and a “marketplace based model”.

I wonder why it took all these years for the DIPP to finally wake up to the fact that it now has to decide – and define – all these terms, when this should ideally have happened at least 3 or 4 years ago.

It’s worth mentioning here that almost all large e-commerce companies in India are majority owned by foreign investors. Since any FDI in B2C [i.e., “inventory-led”] e-commerce is illegal, all the companies were operating through loopholes and this was a shameful open secret in the country.

What this new policy note does is that it eliminates the cat and mouse game that startups and the government have been playing for years now, along with bureaucratic overheads and waste of time that came with it.

Other than actually define the key [and dare I say, basic] terms, such as “e-commerce”, “marketplace” model and “inventory-based” model, this clarification from the DIPP doesn’t achieve [or announce] anything new.

Essentially, this is an extension of the status-quo, as far as permissible FDI is concerned with respect to marketplace e-commerce. 100 per cent FDI in marketplace e-commerce was, anyway, always allowed in India.

By clarifying that FDI is NOT allowed in B2C “inventory-led” e-commerce, this effectively prevents smaller online retailers from raising FDI, and leaves them bereft of scale and beholden to the “marketplace” model for raising foreign capital. Indian e-commerce majors, which are essentially marketplaces, would have wanted this because this shuts Amazon and its primarily inventory-based model out of India. The company has, however, managed to own parts of the process, by providing ‘Fulfilled by Amazon’ services for certain retailers, where it stores inventory in its own warehouses for the sellers, and delivers goods to the buyers, again, on behalf of the consumers. It’s largely only different on paper, but this is clearly allowed, as per the circular: “E-commerce marketplaces may provide support services to sellers in respect of warehousing, logistics, fulfillment, order fulfillment, call centre, payment collection, and other services.”

My question is: if one is allowed to store inventory on behalf of the sellers – and FDI is allowed for that – why can’t FDI be allowed if you actually begin to “own” that inventory? Clearly superfluous, isn’t it?

In the light of this, one is led to think whether this is indeed a “masterstroke” or a new legal quagmire for e-commerce players? Especially, because the Press Note also says “an e-commerce entity will not permit more than 25 per cent of the sales affected through its marketplace from one vendor or their group companies”.

Now, WS Retail, which has been cleverly carved out of Flipkart and is the exclusive seller / vendor to Flipkart and, similarly, Cloudtail [49:51 JV between Amazon and NR Narayana Murthy’s Catamaran Ventures, the exclusive seller to Amazon contributing to around 40 per cent of Amazon India’s sales] will have to be pruned down. Or, similar arrangements, under the guise of “group companies”, will have to be floated under multiple vendors so as to comply with this restriction of “not more than 25 per cent of the sales coming from one vendor”. Which, as I fear, can possibly lead to further exploitation of loopholes in the policy and, consequently, legal quagmire.
I beg to ask the following questions:
[Q1] Why, in the first place, have this differentiation between ‘marketplace model” and “inventory-led model” in e-commerce? Why can’t we just have a simple straightforward one definition of e-commerce, regardless of whether it’s marketplace or inventory-led. Let the respective e-commerce companies decide how they want to run their business, through inventory-led model, or marketplace model, or a hybrid combination or both [with the non-negotiable bottom-line of offering best-in-class consumer experience that can be owned from start-to-finish].

[Q2] The current provisions, as interpreted in simple terms, is that “we will allow 100 per cent FDI [i.e., full foreign ownership] in an online mall [i.e., “marketplace” model] that facilitates and connects multiple retailers and SMEs to end-consumers through a technology-led platform [enabled by internet], but NOT allow 100 per cent foreign ownership if the e-commerce entity sources merchandise directly from different brands / retailers and stocks it in their warehouse [through own inventory]”. Now, how utterly ridiculous is this logic? I am sorry, I neither see much rationale or logic in this, nor do I see a similar precedent anywhere in any progressive country that truly espouses “ease of doing business”. Pray, kindly enlighten me on the perceived threat [or negative ramifications] of having majority/full foreign ownership in a pure-play e-retailer who sources [and owns] merchandise, stocks them and sells them directly to the end-consumer.

[Q3] To think that Amazon, Flipkart, Myntra, Snapdeal, Paytm, et cetra are NOT indulging in direct “retail”, but operate ONLY as a “marketplace” model is completely fallacious. A deeper, closer look at the way WS Retail has been carved out from Flipkart and structured [and, similarly, Cloudtail, the single biggest seller on Amazon India] will help explain the point, that how e-commerce companies manipulate and circumvent the rules so as to comply with these regulations [that can, otherwise, be simplified and made more straightforward].

[Q4] Similarly, in traditional brick-and-mortar format of retail, this differentiation of “single-brand” and “multi-brand” has been on for a long time now, exists only in India. Per the current regulations, “we are fine with a foreign retailer [such as IKEA or an H&M] who sell only one category [so-called “single-brand”] of products, but not fine with, say, a foreign hypermarket retailer [such as Carrefour, Tesco or a Walmart] who sell multiple categories. Now, isn’t this is a logic which is very difficult to understand? Assuming there is a perceived threat [which I don’t believe though] that “multi-brand” retailers will take away livelihoods of the unorganized traders, that threat is only limited [if, at all, meritorious and true] to the extent of food, fresh fruits & vegetables. In that case, exclude this category, and make the regulations simple, clearer, and more open. Do away with this “single” and “multi” brand retail definitions and have a set of regulations for the brick-and-mortar format of retail that is simple, easy and progressive.

[Q5] What stops the Government of India from conferring “Industry” status to Retail? This has been a consistent plea for over a decade now. India’s Retail market is expected to nearly double to US $ 1 trillion by 2020 from US $ 600 billion in 2015. Indian Retail market is counted among the top four in the world and is one of the fastest growing, accounting for 14 per cent of GDP and employing over 7% percent of the total workforce, second-largest employer after agriculture. Yet, no “Industry” status for Retail.

Truly hope the necessary corrections will be made at the earliest, during the tenure of this Government.

Pravahan-MohantyAbout The Author: Pravahan Mohanty is a Brand Strategist and a Retail Communications professional with over 11 years of experience. He has previously worked at Reliance Footprint, Marks and Spencer and at TPG Wholesale Pvt Ltd., apart from the Retail Business Advisory & Consulting services at Ernst & Young and PricewaterhouseCoopers. He is passionate about delving deep into Consumer Behavior and and working on developing Retail models and formats to tap the emerging [and ever-changing] buying behavior of consumers.  

The views and ideas expressed in this article are his own.