Foreign Direct Investment in E-Commerce Sector in India can be a confusing area to venture in. In this article, Aditya Shrivastava, Manager Content Marketing at iPleaders has some interesting insights to offer.
On 1st April 2016, a group of startups in India breathed an air of relief after the government announced 100% FDI in e-commerce through an automated route as per a report by Economic Times. The move seemed legit as it had the potential to enable 20,000 offline retailers to sell their wares through small and large online platforms and prosper accordingly.
In the past 2-3 years, Indian multi-brand e-commerce sector has been the center of quite a few headlines. Witnessing exponential growth, investments ranging in millions of dollars, uncountable mergers, and acquisitions, businesses being valued for costs unimaginable and an ever-increasing competition between domestic and global champions, the e-commerce industry is touted to be on an all-time rise.
However, there were a couple of confusions too. For example, the retail face of IndiaMart, Tolexo abruptly shut its operations after a government notification created a lot of chaos regarding the FDI in the retail sector. The FDI policy issued by Department of Industrial Policy and Promotion (DIPP) imposed a ceiling of 51 percent FDI in multi-brand retailing, subject to government approval and observing relatively complex conditions.
The situation has been a little better after the Government of India issued Press Note 3 of 2016 on March 29, 2016, and subsequently, the Reserve Bank of India codified it in the form of a regulatory amendment on March 9, 2017 (as the Policy Amendments) exactly a year later.
With an aim to reinforce the investors and stakeholders sentiments in the Indian e-commerce sector, these policy amendments are directed to ensure that online and offline B2C businesses are put on the same pedestal as B2B business models. Of course, there are a few problematic regulations. However, there have been efforts to change the same like offering guidance to the companies to receive FDI.
Marketplace And Inventory Model
The policy amendments have taken a step further in defining and clarifying the scope of a “marketplace” e-commerce model as a company which only offers a platform to sellers who wish to get listed on the platform for selling goods directly to the end users/customers/consumers in India. This makes them a mere facilitator between a seller and a consumer. These platforms have no ownership over the goods sold on such marketplace platforms. Giants such as Flipkart, Amazon, Snapdeal work on the same model.
The policy amendments also take a step further to define an inventory based model of e-commerce. Unlike marketplaces, inventories in e-commerce sell only their own goods to the end customers. That is, the entity which owns the platform sells its own products to the end-users. This means the e-commerce entity is a seller too.
The underlying difference between inventory model and marketplace model is the fact that the said policy amendments do not allow any FDI in an Indian e-commerce company which operates as an inventory. Which was also one of the major reasons for Tolexo to fail. Thus, while the FDI is permitted upto 100 percent to those companies who are operating as marketplaces, inventory-based models are falling apart each passing day. Even the companies which are permitted as marketplaces are subject to various compliances in order to avail 100% FDIs.
Should The Inventory Based Companies Be Scared?
Not all hope is lost. If a report by The Hindu is to be believed, the government is further trying to relax the FDI norms. As per FICCI, “FDI should be allowed in B2C e-commerce in a phased manner, and there could be a requirement to source significantly from within India to promote ‘Make in India’ and focus on preferable sourcing of certain percentage from SMEs and MSMEs.”
It is imperative that the companies who are trying to venture into B2C inventories and even marketplaces take extremely calculated steps. The regulatory uncertainty should not impact the business in the long run. An easy way is to keep yourself updated and track every notification by the government. It is also advisable to take up a course if required to ensure that all the risks are taken care of beforehand, and the nuts and bolts of regulations are well understood.
These pointers can help you take your game a notch higher if you are running on a marketplace model:
- As a marketplace, you can only act a facilitator of various goods and services. You cannot in any way whatsoever, influence the selling price of any goods or services on your platform.
- Registration of the seller with your platform is non-negotiable. You cannot permit anyone to sell on your platform without authenticating them.
- A single vendor or its group companies can only sell up to 25% of the total sales on your platform.
It might seem strange, however, much before the policy amendments were officially operational, leading e-commerce businesses with FDI such as Amazon, Flipkart, Ebay, Snapdeal, etc., had already started restructuring themselves on the guidelines which the current policy holds. It is easy to presume that such alignment can be primarily to avoid the increasing litigations and regulatory uncertainty while the policy was being framed. However, the startups which are recently coming up need to ensure that such regulations are complied with accordingly.
In the same article, Sunil Munjal, past-President, CII, said “startup should be defined as any business within the first three years of its existence, employing 50 people or less, and having a revenue of Rs. 5 Crore or less. He added that such startups should be given the benefits of simpler labour laws and lower tax rates.”
For the newer start-ups and e-commerce companies which are proposing or considering FDI for their companies, it is essential that they are aware of key policy considerations, regulatory uncertainties and the challenges that the two have to offer.
As these policies are fairly new, it is undeniable that such issues will keep on evolving and settling as the amendments progress. What is important is that one must stay at par with them. Read as much as possible, take up online courses and subscribe to RBI, FICCI, DIPP, etc. on your feed. It is also advisable to speak to the experts and the ones who have suffered before. Do what it takes to keep your business safe and secure.