100% FDI in e-commerce: promoting growth with governance

Press Note 3 of 2016 issued by DIPP is a masterstroke of regulating a e-commerce model and but making way for many more business models not only for e-commerce entities but also for Indian Startups , Manufacturers and offline retailers wherein the society is ultimate beneficiary. This is a welcome step, not only because it is going to facilitate foreign investment in a big way but also because it has clarified FDI regulation on e-commerce sector. It provides guidelines for the two business models - marketplace based model and inventory based.

Prior to this, the absence of clarity in rules and regulation in the e-commerce, resulted in unintentional/intentional malpractices. The detailed and lucid press note issued by the government, puts all the loopholes used for advantage by ambitious e-commerce players to rest. It will bring in compliance to the whole structure of e-commerce and promote growth that will be endorsed with good governance across this sector.

The quantum of FDI in e-commerce is huge and so is its future resulting potential. I believe this has motivated the government to adopt a phased approach to regulate the e-commerce companies and the recent development is one of the phases. This regulatory note lays down various rules and regulations for all the business models of e-commerce companies.

Highlights of the 100% FDI press Note

• Defines e-commerce, e-commerce entities, models of e-commerce - marketplace model and inventory based model.
• Upto 100% FDI through automatic route is permitted to Business to Business (B2B) e-commerce that is the marketplace model.
• The marketplace will be the facilitator that provides support services that are e-commerce platform, logistics, call center, warehouse, payment collection, customer care and other services but can’t hold or own inventory.
• No FDI for Business to Consumer (B2C) that is inventory based model.
• FDI is permitted to B2C in case of a manufacturer who manufactures the products in India and sells through a single brand.
• Put rest to discount war and resultant malpractices as e-commerce entity can’t influence the prices in any manner;
• Details of sellers to be mentioned as also prescribed under Legal Metrology Act for pre-packed goods.
• One Vendor can’t contribute more than 25% of a e-commerce entity; and
• Reinforces that all the payments and transactions happen in conformation to payment gateway and payment settlement guidelines laid down by RBI.

Impact:

Old Players

Now, the e-commerce companies have to develop viable and sustainable business models. In fact online portals like Just dial, bookmyshow etc. charge from the customers for their service and still have sizable consumers. Quicker logistic is one such initiative wherein you are improving the consumer experience but also adding a revenue model. It goes without saying that such services will improve the good will and volume of satisfied customers.

Most of the present e-commerce companies might have to restructure themselves since not more than 25% of sales have to come from a single vendor or group of companies and that can be very restrictive in case of high valued products and the marketplace does not control the price of the products. It simply puts the vendors together for sale.

E-commerce companies have been resorting to huge discounts to acquire customers at any cost. This also resulted in manipulative, unfair and restrictive trade practices by many e-commerce entities. Such practices make them vulnerable to complaints under Competition Act, 2002. Since, they have access to substantial FDI, so discounts were offered, irrespective of commercial rationale. Various government authorities and Delhi High Court in 2015 directed Enforcement Directorate (ED) to investigate more than 20 e-commerce companies for violating FDI norms. If found guilty they will be liable to pay fine up to three times of the amount involved and might be required to change their business model.

As per press note e-commerce companies can’t influence the prices in any manner whatsoever i.e. directly or indirectly. So if an e-commerce company tries to influence the prices through associated entities or following any structured channel, then they can be held liable for non-compliance of the FDI regulations. So restriction is generic and has wider scope.

There will be a respite for smaller e-commerce players with limited investors and resources since they don’t have to bleed themselves to discounts now.

Buyers

Discounts have been the biggest attraction for the buyers but the latest press note prohibits absurdly high discounts. Hence, the buyers will find online bargains lesser attractive.

However this downside is a blessing in disguise for buyers. The buyers, lured earlier to buy discounted unbranded products, will now be guaranteed a full quality satisfaction of the products... E-commerce companies now can’t use their funds to offer discounts, directly and indirectly.

Now e-commerce companies will be shifting more funds towards building quality services for consumers. Hence it’s a win-win situation for consumers as they will now buy the branded quality products and not duped into buying duplicate products, with high quality services. We all are witness that since birth of e-commerce in India the logistic services have improved tremendously. This results in benefit to consumers and also lot of employment opportunities in India.

Hence, this note makes way for fairer and quality centric trade practices.

Start-ups

This press note defines the B2B and B2C model and abstains the B2C model that is inventory based model from FDI. However there are a few exclusions.

An Indian manufacturer or single brand retail entity having offline retail or the Indian manufacturer who is the investee and the owner of the Indian brand can do B2C through e-commerce, hence making way for FDI in manufacturing sector in India under Make in India initiative and also create a business model for aspiring e-commerce entities in India. Such e-commerce entities can become platform for Manufacturers of Single Brand products in India and MSMEs’. They can provide them e-presence, digital marketing and technology support initially and then with more financial muscles, other allied services.

For e-commerce startups it is better to raise initial fund from Indian sources directly rather than using off shore route, hence Indian entities as e-commerce companies can do B2C or inventory based e-commerce if they don’t have FDI.

Offline Retailers and manufacturers

The press note clearly prohibits the marketplace entities to directly or indirectly influence the sale price of goods and instructs to maintain a level playing field for all. Hence, the price war comes to an end. This will also have a check on the sale of imported low quality goods. Hence Indian Manufacturers and offline retail will become competitive.

This press note will actually push the Make in India campaign since as per this press note the manufacturers of single brand can follow e-commerce for B2C for products manufactured and sourced by them in/from India subject to certain restrictions. Big International brands will be keen to open up for manufacturing in India as they can take leverage on modern channels of marketing besides brick and mortar model.

In fact Manufacturers, offline retailers and e-commerce can become entities together and can articulate most efficient, effective and scalable e-commerce model, where in the goods are produced by manufacturer, marketing platform are of e-commerce entity and localized offline retailers are logistic partners.

This model will be a win-win situation for all three stakeholders.

100% FDI – conclusive or inchogerent

As per the press note B2C through e-commerce is permitted for manufacturers in India who are owner of an “Indian Brand”. The ambiguity surrounds the definition of Indian Brand. So will an international brand having manufacturing unit in India under single brand and also having the Brand Registered in India, be eligible to use e-commerce for B2C? In my view word “Indian Brand” may be construed as any brand having manufacturing facility in India and registered in India also.

Further it is mentioned that Indian Manufacturer should be an Investee Company in B2C platform but no limit has been defined for the same. So just to avoid any uncertainty or malpractices, it is advisable to prescribe the limits as well. However limits should be such that it facilitates collaborative approach between Manufacturers and e-commerce entities.

Largely, this policy will be a front runner since it has given clarity and recognition to the fast growing sector of e-commerce. It will also bring in certainty by attracting more and more foreign investments thus a big boost to the business, economy and society at large.

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This release was published on openPR.