Govt allows 100% FDI in e-retail, but with riders

Almost 10 years after e-commerce started in a big way, the National Democratic Alliance government on Tuesday allowed 100 per cent foreign direct investment (FDI) in e-commerce marketplaces.

Though it has been introduced with a few riders, the reform comes just ahead of Chinese major Alibaba's proposed entry into the country. It also coincides with a recent markdown of valuation of e-commerce companies.

Some of the prominent e-commerce marketplace players in India are Flipkart, Snapdeal, ShopClues and Paytm - all funded by marquee foreign investors. American major Amazon, the biggest rival for Flipkart, too, entered India as a fully-owned online marketplace player two years ago.

The sector has got an estimated $10 billion (Rs 65,000 crore) of foreign investment since it began in a big way 10 years ago. In 2015, around $5 billion (Rs 32,500 crore) of foreign funds were raised by e-commerce companies. Even now, no FDI is allowed in inventory-led online businesses that companies such as Amazon have in the US.

Till now, policy guidelines had stated that no FDI was permitted in e-commerce.

While liberalising e-commerce, the Department of Industrial Policy & Promotion (DIPP) has introduced conditions to ensure that platform owners do not turn sellers. Some of the conditions are that sales cannot exceed 25 per cent for any vendor, marketplace players or their group companies cannot sell, guarantee and warranty must be the sole responsibilities of the sellers, and platform owners cannot influence pricing of products so that there's a level-playing field.

International consultants and analysts claim that the government's move will bring in greater foreign investment into a sector that is set to grow from $16 billion to $70 billion by 2020 (excluding travel). But, domestic traders' body Confederation of All India Traders (CAIT) has hit out at the government, calling it a U-turn in policy that will permit backdoor entry to global players.

International players as well as Indian entrepreneurs have exploited the grey area in the policy till now, thereby running online operations with dollar funds from marquee investors.

Online marketplace platforms, where companies such as Amazon India, Flipkart, Snapdeal and many others hosted thousands of sellers, 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 government has now put an official stamp on how the e-commerce majors have for many years operated their business.

Almost two years after coming to power, the NDA has brought some clarity to the sector. Multi-brand retail, however, continues to be a category open to interpretation.

While its predecessor, the United Progressive Alliance had permitted 51 per cent FDI in multi-brand retail, the NDA is opposed to foreign investment in the area as that could result in loss of jobs for local traders and neighbourhood stores. It has, however, not changed the rulebook on multi-brand policy, execution of which is anyway with states.

DIPP has clarified that 100 per cent FDI is only for the marketplace format of e-commerce, where the company provides a platform to act as a facilitator between buyers and sellers - and not for the inventory-led model.

It has defined e-commerce as buying and selling of goods and services, including digital products over digital and electronic network.

"The government has come with a much-needed clarification on foreign investment in e-commerce," said Amarjeet Singh, partner, tax, KPMG in India.

"Although, some of the structures practiced by existing players may require alteration, it will give the much-needed clarity to undertake business with certainty in longer term. Needless to add, this will further facilitate foreign investment in this sector," he added.

The cap of 25 per cent on sales by a vendor on a marketplace will ensure a broad base of vendors for a true marketplace, said Akash Gupt, partner and leader, regulatory, PwC. "This may require some of the operators to go on the drawing board to comply with the conditions."

He added: "This sector has attracted the maximum FDI in 2015. Enabling the marketplace operator to provide value add services like warehousing, delivery, payment processing will improve customer experience and market outreach for small and medium size suppliers."

However, there are others who said that while the government is moving in the right direction bringing in FDI in the inventory-led model would have been a better move.

"Marketplace was never in the purview of the government. What should have been done is allowing FDI in the inventory-led model, which would have been a game changer,'" said Sandeep Aggarwal, the founder and chief executive officer of Droom, who also founded ShopClues.

The conditions that have been introduced with FDI in marketplace are being seen as tough by some. According to Paresh Parekh, tax partner, retail & consumer products, EY, certain new conditions regarding limit on single vendor sales through marketplace could impact certain existing players.

Also, Aamir Jariwala, secretary, E-commerce Coalition, said: "Unnecessary restrictions on the number of sellers and sole responsibility on them for warranty and guarantee will throttle the growth of the industry."

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