This article is written by M Arjun, pursuing a Diploma in Cyber Law, Fintech Regulations and Technology Contracts from Lawsikho.com. Here he discusses “Recent Changes In 2019 FDI Policy for E-commerce Stores”.

Introduction

 The word e-commerce is no longer a buzzword for Indians. The e-commerce industry had seen proliferating growth in the past few years. With 451 million monthly active Internet users at end of financial year 2019, India is now second only to China in terms of internet users, according to a report by Internet and Mobile Association of India. Thanks to cheaper data tariffs and availability of a plethora of affordable smartphones in the Indian market. India is the fastest-growing market for the e-commerce industry. Reports suggest that revenue from this sector is expected to rise from US$ 50 billion in 2019 to a whopping US$ 200 billion in 2026. Almost 6 million new entrants are added to this sector every month. In light of all these reasons and expectations, the e-commerce industry in India has gained a lot of attraction from foreign countries in the form of investments, mergers and acquisitions. E-commerce and consumer internet companies received around US$ 7 billion in private equity and venture capital in 2018. 

Foreign direct investment in the e-commerce sector has been a controversial topic ever since the inception of this concept. E-commerce in India is broadly classified into two prominent categories- (i) A marketplace model of e-commerce, (ii) An inventory model of e-commerce. The former model is also termed as the B2B model where the e-commerce entity offers a technology platform and acts as a facilitator between the sellers and the customers. Whereas the inventory model is called as the B2C model in which the e-commerce entity controls the inventory and sells it to the consumers directly. E-commerce behemoths such as Amazon and Flipkart are classic examples of market place entities. An online store for “Jockey products” owned and managed by Jockey is an example of an inventory-based model. The FDI policy for both these model differs accordingly.

FDI In E-COmmerce Activities

FDI policy in e-commerce was first promulgated through Press note 2 of 2000. E-commerce was never a trending topic back then. The immense growth of this sector after 2015, forced the Department of Promotion of Industry and Internal Trade (“DPIIT”), erstwhile called the Department of Industrial Promotion and Policy (“DIPP”) to come up with a robust framework to govern FDI in this booming industry. As a result, the DIPP published the FDI policy through Press note 3 of 2016. The provisions of the press note allowed 100% automatic route FDI (without any approval) for e-commerce entities operating as per the market place model.  However, the policy strongly disallowed FDI in inventory-based models. On the other hand, market-place e-commerce entities circumvented these policies and exploited the lack of clarity in the provisions.  Despite the implementation of the 2016 policy, deep discounting and violations of the provisions of the FDI policy continued to be the aftermath. Numerous allegations and complaints were raised by various retailers associations such as the Retailers Association of India (“RAI”) and Confederation of All India Traders (“CAIT”). 

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These situations along with the change in market dynamics forced the DIPP to come up with more stringent provisions for regulating FDI in the sector. By that time, India witnessed its largest merger deal and the world’s biggest e-commerce deal ever. The U.S giant “Walmart’ entered the Indian e-commerce scenario by acquiring over 77 per cent ownership in the e-commerce giant Flipkart. Later the DIPP released the subsisting FDI policy through the Press note 2 (2018 series) on December 26th of 2018. This publication caught international attention and contributed towards the agitation of dominant players such as Amazon and Flipkart. The 2018 FDI policy came into force from February 1, 2019. 

Analysis of the Existing Policy

• The 2018 FDI policy was a reiteration of previous provisions to suggest measures for the better implementation of the 2016 regulations. The 2016 policy mandated that not more than 25% of the total sales of the market-place entity should come from a single seller. The e-commerce giants like Amazon, Flipkart and Myntra confronted with the policy by creating more affiliated sellers. Hence, the provision added for limiting the powers of affiliated sellers went in vain. This requirement was omitted from the 2018 guidelines. The preceding policy suggested that market place entities should not exercise ownership over the inventory of the goods purported to be sold.  A significant change found was that the DIPP added the term “control over the inventory” which has not been duly defined. However, the policy considers the e-commerce market-place to have control over the inventory if more than 25% of a seller’s inventory is purchased from the Marketplace Entity or its group companies. If this condition is breached, then the e-commerce entity will be deemed as an inventory model thereby detaching it from the purview of FDI. The addition of the term “control” has been done to ensure stringent compliance with the provision of ownership over the inventory. Besides, the policy bars e-commerce entities from directly or indirectly influencing the price of products. Earlier an e-commerce entity would buy goods at discounted prices and sell it to its affiliated sellers. These sellers would sell it back on the platform to the customers.
• Press Note 2 of 2018 states that “an entity having equity participation by an e-commerce marketplace entity or its group companies will not be permitted to sell its products on the platform run by such marketplace entity”. The objective of this policy is to limit the equity stakes of e-commerce entities on third-party sellers. The 2016 policy did not prohibit equity participation. But the DIPP has not clarified whether both direct and indirect equity participation counts. Similarly,  no threshold of equity participation has been defined in the policy. sold in its platform.
• The policy has also laid down conditions for ensuring a level playing field between the sellers of the market-place. The affiliated sellers are always equipped with better infrastructure, logistic support, and deep discounts for attracting customers. As per the new policy, an e-commerce entity has to offer services like warehousing, marketing, financing and payments to all of its sellers in an impartial basis at similar circumstances. There should not be any discrimination based on support, cashback and discounts. E-commerce companies were already known for preferring sellers who offer better discounts. It is often seen that the platform backed sellers receive enormous funding and provide better services to the consumers. But, the policy can be detrimental to the vendor ecosystem. A seller may by itself introduce faster delivery and offer deep discounts to capture the consumers. The sellers in a platform sell different goods. The word “similar circumstances” bring in a lot of ambiguity as the nature and mode of operation of each seller may be distinct. 
• Press Note 2 of 2018 requires that an “e-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only”. For instance, Oneplus smartphones are exclusively sold via Amazon India and not any other e-commerce marketplaces. The policy aims at curbing this exclusivity to bring in fair competition and ensure better consumer protection. Apart from exclusive contractual clauses forced by e-commerce entities, there can be several informal arrangements. Moreover, most brands are comfortable in selling through a single platform. Various online brands ever since its establishment have been selling their products successfully through these platforms. In fact, brands feel obliged to sell their products exclusively on a single platform or a seller after considering the services provided to them. Amidst this regulation, brands/sellers may not be willing to take a bet on their business practice. Oneplus has already announced that it does not have any contractual arrangements for ensuring exclusivity to Amazon, instead, the decision was deemed to be a strategic choice. Hence, the need and complexity of the implementation of this provision remains a  question. The policy also comes with certain compliance for e-commerce companies. The press note requires the companies to furnish a certificate along with a statutory audit to the Reserve Bank of India by 30th September of every year for the preceding financial year. 

Aftermath of the Policy

• The policy came into effect on the 1st of February 2019. The policy was blamed to be formulated without consultation with the stakeholders. The U.S based e-commerce giant Walmart called the policy ‘regressive’ as it creates an unfair playing field between foreign and domestic entities. The Ministry of Commerce and Industry had many meetings with the e-commerce stores to discuss the new policy. Some speculated that the policy was to guarantee the support of the offline retailers and their associations for the general elections held earlier this year. It was also considered as an invitation for Indian giants like Reliance to enter this space. 
• Soon after the implementation of the policy, the sales revenue of Amazon, Flipkart and other e-commerce giants took a considerable hit.
• Ever since the announcement of the policy, the biggies of the sector were busy ensuring compliance with the new policy. Many of the sellers in these platforms had to change in their business structure. Soon after the deadline, the biggest e-tailers of Amazon, Appario Retail and Cloudtail India had to stop their activities for a week. These sellers were the backbone of the platform, where Amazon held a significant amount of stakes. But soon after these entities made a comeback in their new avatar. N.R Narayana Murthy’s “Catamaran Ventures” increased their stake in Cloudtail India to 76% from 51% earlier, reducing Amazon Asia’s stake to 24% from 49%. Cloudtail has independent plans as well. Similarly, Appario, the other large seller on Amazon, made a comeback through the same restructuring route. Appario is a subsidiary of Frontizo, which is a joint venture company in which the Patni Group holds a 51% stake and Amazon Asia Pacific Holdings holds 48%. Post the restructuring Amazon has reduced its equity participation to below 25%. Since the equity participation is below 25%, these companies no longer remain the group companies of Amazon and will not have any directors on their boards. Flipkart was less affected as their affiliated seller “W.S Retail” stopped its business a year ago. Flipkart from then has started to diversify their list of sellers. 
• There was a misconception regarding the prohibition of the sale of private labels through the e-commerce marketplace. Private label refers to the brands developed in house by the e-commerce entity. However, the Government has clarified that it does not place any restriction on the nature of the products sold through the platform. Private label brands drive in more revenue for e-commerce companies. The need for a statutory audit and submission of a certificate to the RBI before 30th September of every year is still unanswered. Honourable Minister for Commerce and Industry has directed RBI to make requirements to ensure compliance with the requirement. However, no notification has been served by the RBI with regards to the matter till date.

Conclusion

The main objectives of the 2018 Press Note were to ensure a level playing field between the FDI powered e-commerce companies and other online as well as offline retailers. The Retailers body such as the Confederation of All India Traders (“CAIT”) considered the policy to be a welcome move from the government. To much of the contrast of their expectations, it can be rightly said that not much has changed during the past 8 months. CAIT has made several protests and flooded the government departments with complaints regarding deep discounts, festival sales and predatory pricing. DIPP had organised multiple meetings with the e-commerce entities and had ordered investigation on deep discounts and festive sales conducted by these companies. Amazon and Flipkart were already sent questionnaires to study their seller lists and mode of operation. Issues such as predatory pricing are already before the Competition Commission of India. 

Amidst all these efforts coming from various corners, e-commerce in India is thriving towards new heights. Amazon and Flipkart despite making losses each year are continuing their practice of offering eye-catchy discounts and cashback. It is clear that these entities are playing a real long term game considering the massive potential of e-commerce in India. Festival sales and other sales have increased in number. Discounts on Fast Moving Consumer Goods (FMCG) products are scaling into new heights. Hence the effectiveness of the 2018 policy remains a complicated question. The contribution of banks, credit card companies and payment aggregators in offering discounts cannot be ruled out. The policy nowhere addresses the role of other entities in offering discounts. A draft e-commerce policy has been released by the DIPP in February 2019. Provisions for better regulations are expected in the final draft which is expected to be released in 2020. The 2018 FDI policy has many grey areas and requires clarifications and additions in many provisions, for achieving its objective. The industry giants with certain restructuring have easily circumvented various provisions of the policy. The e-commerce industry is one of the most promising sectors and prudent regulations are incidental to sustain its growth. Considerations should be given to offline retailers as well. So it is important that the government needs to come up with better policies that serve the interest of all the stakeholders in the retail sector. Apart from the formulation, measures must be taken to avoid exploitation of the loopholes and for the better implementation of such policies.      

Reference

1. https://www.trilegal.com/index.php/publications/analysis/review-of-fdi-policy-in-e-commerce
2. https://www.ikigailaw.com/development-of-the-fdi-policy-for-the-e-commerce-sector/
3. http://www.mondaq.com/india/x/798970/Inward+Foreign+Investment/Changing+Landscape+Of+The+ECommerce+Sector+visvis+The+FDI+Policy
4. https://economictimes.indiatimes.com/industry/services/retail/cloudtail-appario-push-brands-for-higher-margins/articleshow/70338317.cms?from=mdr
5. https://www.entrepreneur.com/article/342915

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