Govt may not allow FDI in online firms selling via inventory-based model

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The government may drop the proposal of the draft e-commerce policy to allow foreign direct investment (FDI) in Indian online firms selling through the inventory-based model. 

The draft e-commerce policy, which drew flak from several quarters, suggested that the sale of domestically produced goods through online platforms should be promoted by allowing limited inventory-based B2C (business to consumer) model. The draft favoured up to 49 per cent foreign equity in inventory model in the case of 100 per cent made in India products sold through Indian management-controlled platforms with resident Indian founders/promoters.

The government has no intention of allowing FDI in the inventory model, secretary at the Department of Industrial Policy and Promotion (DIPP) Ramesh Abhishek said on Tuesday at a day-long session organised by Swadeshi Jagran Manch (SJM), a Rashtriya Swayamsevak Sangh-supported entity, on e-commerce. 

He also said the government was open to modifying the Press Note 3 that lays out the norms for FDI in the e-commerce sector. Senior sources in the Commerce Department pointed out that stricter norms against 'deep discounting' that distorts prices may be incorporated into the norms.

The current FDI norms allow foreign capital in the sector only when the company acts as a marketplace facilitating other third party sellers on its platform, like in the case of Flipkart or Amazon. An inventory model, however, allows a company to sell fully-owned products on the platform. 

"We know that allowing FDI in made in India products, would be equal to allowing FDI in the retail sector. So, when there are no plans to introduce FDI in the regular retail sector, there are no plans to allow FDI for the sale of products through e-commerce as well," Abhishek said.

FDI violations to be probed soon

In the backdrop of trade associations alleging lax implementation of FDI norms, citing the recent approval of the Walmart-Flipkart merger by the Competition Commission of India (CCI), Ashwini Mahajan, co-convenor of SJM, said, “online and offline businesses are considered separate by the CCI and should be kept so.’’ Despite the commerce ministry announcing Press Note 3, restricting FDI in retail, major e-commerce players have managed to channel into India millions of dollars, according to Mahajan.

"I have discussed FDI press note 3 complaints against e retailers with the finance secretary. These should be looked into," Abhishek said. As a result, several complaints against e-tailers violating the FDI norms, may be investigated soon. The same committee has also been tasked to look into the regulations for startups, in a bid to reduce the high cost of compliance for local companies compared with foreign ones, he added.

Serious complaints against product quality are also not being addressed, according to the Confederation of All India Traders (CAIT). "While the Enforcement Directorate under the Finance Ministry is currently tasked with handling violations of FDI norms, most complaints about e-commerce products are forwarded to the Consumer Affairs Ministry. Most complaints are not addressed after that,’’ CAIT Secretary General Praveen Khandelwal said.

Giving an insight into the FDI flow into the retail industry, Abhishek pointed out that single brand retail trade had attracted just $1 billion in the past 10 years.

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After the task force on e-commerce submitted its final recommendations on policy changes earlier this month, the government was expected to bring out the final draft by August end. But plans were scuttled with multiple ministries arguing against the proposal and the Prime Minister’s Office scrutinising the plans. Now, the national think tank on e-commerce chaired by Commerce and Industry Minister Suresh Prabhu will take into consideration the final recommendations of another inter-ministerial meeting set to be held soon, a senior Commerce Department official said.
The road ahead
  • Govt may also modify Press Note 3, which lays down norms on FDI in e-commerce
  • Stricter norms against 'deep discounting' by big players may be put in
  • Investigations against FDI norm violations may begin soon
  • Committee under Finance Secretary may look at related issues

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