India has seen massive growth in the e-commerce sector in the last few years. The reason for such an influx could be digital literacy and more and more reliance on the online digital platforms, as the consumers have adopted the process of online shopping leaving behind the idea of traditional shopping. With this influx, more e-commerce giants are entering the market, and the e-commerce market in India is expected to reach a soaring height of US$ 111 Billion by the year 2024. This leap could be attributed to the rise in Foreign Direct Investments in India, or the other way around.
As per the latest FDI Policy in 2020, Under the FDI Policy in India, the Equity/FDI cap on e-commerce activities is set at 100% through the automatic route. However, e-commerce startups and entities should engage only in the Business to Business (B2B) e-commerce and not in the Business to Consumer (B2C) e-commerce. This step has been taken to put a leash on the e-commerce giants such as Amazon and Flipkart which acquired a large share in the online marketplace.
The Indian e-commerce sector is expected to touch $200 billion in the next 10 years. The policy will not just impact online marketplaces such as Walmart-owned Flipkart, Amazon, but other B2B and B2C e-commerce players in different domains like, Paytm Mall, Urban Ladder, Lenskart, food delivery apps and aggregators.
The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry further clarified on the Policy that Foreign Direct Investment shall only be permitted on the marketplace model and not on the inventory-based model. It means that any person resident abroad shall not be allowed to invest in any e-commerce company which is operating through inventory-based model.
The marketplace based model of e-commerce means providing an information technology platform by an e-commerce start up or entity on a digital and electronic network, acting as a facilitator between the buyer and the seller.
The inventory-based model of e-commerce means e-commerce activities where the inventory of goods and services is owned by an e-commerce start up or entity and is sold to the consumers.
It is an important condition under the FDI Policy, that if the e-commerce marketplace or any of its group companies is having a share in the equity of the seller entity, or having control over its inventory, then that entity cannot sell its products on the e-commerce marketplace platform. Further, no e-commerce marketplace entity is allowed to set up discriminatory pricing for its sellers and make an exclusive supply agreement.
Some of the key conditions for FDI in E-Commerce, include Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis, E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfilment, call center, payment collection and other services. Further, E-commerce entity providing a marketplace will not exercise ownership or control over the inventory i.e., goods purported to be sold. Such an ownership or control over the inventory will render the business into inventory-based model. The Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies. An entity having equity participation by e-commerce marketplace entity or its group companies or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.
If any e-commerce platform is flouting with the rules and regulations, they shall not be allowed foreign direct investment.
If we look at it from the perspective of small retailers or your nearby kirana store owners, it solves a big problem along with providing opportunities by the increasing the customer base of small businesses. However, the major problem solved by the new policy is putting a restriction on these e-commerce giants evading the rules. Several complaints were raised by the small-scale traders in respect of competition in the market. Now, these rules will prevent these e-commerce platforms from favoring their own subsidiaries and promoting a discrimination-free environment.
The current FDI Policy on E-Commerce is clearly heavily tilting towards Indian retailers and does not provide level playing field to international e-commence corporates. It is essential that balance maintained between investor's interest and Indian retailers.
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