SUMMARY
DIPP on December 26, 2018, introduced certain changes to the 2017 policy governing FDI in the ecommerce sector
Policy changes in the garb of clarifications have the potential to change the dynamics of Indian ecommerce space
The changes are likely to impact the core business model of the likes of Amazon and Flipkart
Retail is one of the most regulated and politically sensitive sectors in India. Most retail trade is prohibited for foreigners and foreign capital. In this background online retail has been a key area where India has seen massive foreign investment from likes of Walmart, Amazon, Alibaba not to name the marquee funds investing in Indian ecommerce space even when profit was nowhere on the horizon.
The Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce, Government of India, on December 26, 2018, introduced certain changes termed as clarifications to the 2017 policy governing foreign direct investment in ecommerce sector.
The policy changes in the garb of clarifications have potential to change the dynamics of Indian ecommerce space presently dominated by American behemoths namely Walmart and Amazon who between them control more than 75% of the online retail market. In addition, the policy is likely to impact overall internet business space including digital payments space, logistics etc.
The changes have been welcomed by the local Indian business and called draconian by leading American business advocacy groups.
Ecommerce under the Policy is defined as buying and selling of goods and services including digital products over a digital and electronic network. This includes two prominent models:
- Inventory based model of ecommerce – Inventory based model of ecommerce means an e-commerce activity where the inventory of goods and services is owned by ecommerce entity and is sold to the consumers directly. No Foreign Direct Investment is permitted in this model
- Marketplace based model of ecommerce – Marketplace based model of ecommerce means providing of an information technology platform by an ecommerce entity on the internet to act as a facilitator between buyer and seller and the ecommerce entity providing the platform has no inventory of its own. 100% foreign direct investment under the automatic route is permitted in this model.
Key Changes Sought To Be Brought
- An entity providing ecommerce marketplace (“Marketplace Entity”) shall not exercise ownership or control over the inventory which it intends to sell
- Any ownership or control over inventory shall convert it into an inventory based model which cannot receive FDI
- A Marketplace Entity will be deemed to control the inventory of a vendor if more than 25% of the purchases of such a vendor are from the Marketplace Entity or its group companies
- A vendor shall not be permitted to sell on the marketplace owned by the Marketplace Entity if such Marketplace Entity or its group companies own any stake in the vendor or exercises control over the inventory of such vendor.
- Marketplace Entity will not influence directly or indirectly sale price of goods or services sold over the marketplace by the vendors and shall maintain level playing field for all vendors.
- Any services provided by the Marketplace Entity or any other entity in which Marketplace Entity has an equity stake to the vendors on the marketplace shall be provided on arm’s length basis and in a fair and non-discriminatory manner.
- Such services will include fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing etc.
- Cash back provided by group companies of Marketplace Entity to buyers shall be fair and non-discriminatory.
- A Marketplace Entity will not mandate any seller to sell any product exclusively on its platform only.
- An ecommerce marketplace entity will be required to furnish a certificate along with a report ofa statutory auditor to Reserve Bank of India, confirming compliance of above guidelines, by 30th of September of every year for the preceding financial year.
Impact Of Changes On Indian Ecommerce
The above changes are likely to impact the core business model of the likes of Amazon and Flipkart where they encourage sourcing and sales through their preferred vendors like Cloudtail and WS Retail amongst others as they have a direct or indirect equity stake in such preferred vendors.
The customers buying products sold by these vendors are usually given additional benefits in terms of pricing, fast delivery and cashbacks etc. By virtue of overall control, they could provide large discounts, better user experience and quality control.
Furthermore, Amazon or Flipkart by virtue of their dominant positions now cannot insist on exclusive tie ups with brand owners. Also, the private labels launched by Amazon and Flipkart now need to cede space to other players in the same category and cannot be indiscriminately promoted at the expense of other players.
The onus of compliance will be on the Marketplace Entities as they need to report their compliance annually to Reserve Bank of India.
The changes benefit brick and mortar small and medium retail players who for last decade have had to face an onslaught of indiscriminate discounting by the online players. Their lobbying has finally yielded the desired results. Indian retail giants like Future Retail will also benefit as they will be able to match the discounts offered by online retail while providing instant delivery.
Pure play marketplace like Snapdeal or Shopclues will also benefit from the change in policy. These marketplaces are not flush with VC money to offer deep discounts but generally seem to comply with the requirements.
Though there are certain grey areas which will need further clarification and may give some elbow room to the entrenched players like with respect to 25% norm it can be argued that it is limited solely to sourcing and not sale on the marketplace.
The question if a brand voluntarily wants exclusivity with a particular marketplace can it be restricted?
It seems someone in DIPP deeply analysed the practices of giants of Indian e-commerce and came up with these clarifications.
It will be interesting to see if in the coming days the government gives some relief to the likes of Amazon and Flipkart in an election year where the interest of small traders cannot be ignored.
