FDI In Ecommerce: Protectionism Voted Up, Innovation Voted Down

Advising companies and investors in the ecommerce space has been bread and butter for most corporate lawyers over the past few years. As such, there has been little ambiguity on how foreign investment in ecommerce marketplaces are regulated.  The reporting on a recent press note by most sections of the business media and professionals quoted seems to be grossly misleading on (i) what the regulatory position used to be; (ii) how it has changed; and (iii) what this means.

A little background

Companies in India which have no foreign investment are permitted to set up and expand ecommerce marketplace and retail businesses without restrictions, and are well understood under existing principles of contract law and transfer of property. We do not require any further clarity on how to structure an ecommerce marketplace or retailer in India. The question only arose in the context of foreign investment, where opening up retail to capital from foreign investors (as opposed to domestic investors and conglomerates) has been a strange political challenge.

The rules as they existed prior to the press note where very clear – foreign investment in ecommerce activities is permitted without restriction according to the FDI Policy (as updated in November, 2015). According to FDI Policy, e-commerce activities refers to any activity of buying and selling whereby the role of the investee company is restricted to business to business (B2B) ecommerce and not retail trading.

Except for the restrictions imposed on foreign investor funded ecommerce companies in the new press note (in more detail below), none of the paragraphs in the 3 page press note mention anything new that cannot be deduced from above. There are no announcements. New classifications such as inventory-based versus market-place, or language permitting logistics or handling are all unnecessary space-fillers that repeat what can be deduced from existing regulations. It is almost like all the lorem ipsum dolor sit amet was put in to make it look like ‘restrictions were being lifted’ or that there is something in there for the ecommerce companies. While some of the media seems to have bitten, there isn’t actually anything there.

Since under existing regulations, you cannot be a seller and retail products directly and can only engage in ecommerce on a B2B basis, you would be advised by your lawyer not to sell the goods yourself or own the inventory, you would be advised to provide B2B services such as logistics, inventory management, handling etc. to a domestic retailer that would be all encompassing and charge commissions based on the services provided. These are activities that are not prohibited or restricted. Your lawyer would advise that you own the platform where customers come and interact with domestic retailers. That’s how every ecommerce marketplace is built and run in India.

What’s new?

Nothing except the introduction of certain restrictions. In fact, the press note could have been drafted into 2 bullet points instead of 3 pages to say “the following restrictions shall apply to ecommerce activities, which are:

1. No seller will sell more than 25% of the goods on the marketplace;
2. the marketplace will have no contract (or performance of) with a seller whereby the marketplace agrees to fund discounts for customers.”

This is in fact the real “announcement”. Nothing else has changed for ecommerce companies. There was no lack of clarity or ambiguity. We did not need the government to explain in detail how an ecommerce marketplace can be structured under existing regulations – we already knew. So what was all this about?

Behind the scenes

Brick and mortar retail is under massive strain due to online competition and unimaginable amounts of capital is being directed at ecommerce retailers and marketplaces in general – by domestic and foreign investors. There being no way to stop domestic ecommerce retailers from displacing mom-and-pop shops or large offline retailers. So the efforts seem to be directed at attacking foreign capital. Given how India’s foreign investment regulations are structured, this is quite really impossible. You do not actually need to be a retailer to make money, i.e., you don’t really have to sell the goods. If you have access to customers and sellers, the know-how and capital – you can monetise any part of the retail business no matter where you are on the chain.

This is not lawyers “exploiting a loophole”, this is at best, common sense trumping over India’s hare brained foreign investment policy and at worst, the failure of domestic retail lobbies to understand the real challenge. It isn’t coming from foreign capital; it is just technology and innovation that is displacing you.

While current attempts at lobbying the government at restricting foreign investment in retail by the introduction of illogical restrictions such as in the press note may seem like a winning strategy, it is doomed to failure. Best for everyone to wake up and smell the coffee. And fire the business media.