Sourabh Virmani

Sourabh Virmani

On 1st April 2016, a group of startups in India breathed an air of relief after the government announced 100% FDI in e-commerce through an automated route as per a report by Economic Times. The move seemed legit as it had the potential to enable 20,000 offline retailers to sell their wares through small and large online platforms and prosper accordingly.

E-commerce activities are allowed to have a 100% FDI through automatic route. Subject to provisions of FDI Policy, e-commerce entities would engage only in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce.

Though this policy did raise concerns, there was less hue and cry than expected, however, a very critical part of the functioning of these platforms was being upended.

Review of policy on foreign direct Investment (FDI) in e-commerce was released by ministry of commerce and industry on December 26, 2018 to provide clarification on FDI in e-commerce sector as per the consolidated FDI policy circular 2017.

As per the 2017 policy, guidelines for FDI in e-commerce sector specifically provide that:

  • 100% FDI under automatic route is permitted in marketplace model of e-commerce.
  • FDI is not permitted in inventory based model of e-commerce.

The e-commerce policy which has created a disruption during the past few months isn’t entirely new.  As per the 2017 policy, the marketplace-based model refers to the provision of an IT platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. The policy specified that an e-commerce entity providing a marketplace will not exercise ownership over the goods to be sold, and such ownership over the inventory would render the business into an inventory-based model.

The clarification provided by GOI on December 26 2018 doesn’t change anything in the existing 2017 policy, the conditions remain the same as before.

The 2017 policy specified that an e-commerce entity will not permit more than 25% of the sales value on financial year basis affected through its marketplace from one vendor or their group companies. The clarification stipulates that 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, which in turn insinuate that FDI is not allowed. Re-enforcement of FDI policy is destined to bring certain unexpected changes in the e-commerce market.

The new DIPP directive was aimed at dealing a crushing blow to the e-tail companies’ entire eco-system that came together to deliver what rivals repeatedly called ‘predatory pricing’ to kill competition. Government believed that e-commerce platforms’ absolute control over in-house inventory and logistics gave e-tailers absolute control over the business which allowed them to under-price products to kill rivals.

How does it affect the current e-commerce scenario:

India’s biggest e-commerce players Walmart owned Filpkart, and Amazon India had to go through structural changes, they had to twist and turn their holding in the affiliated entities to become compliant to the regulatory changes and amendments.

Amazon and Flipkart have been the most impacted online marketplaces and have seen a drop of around 25-35% in sales after having to rejig their seller entities where they held an equity stake.

Amazon: Amazon’s top two sellers — Cloudtail and Appario Retail removed products sold by them after the new guidelines kicked in on February 1 as they were joint ventures formed by the American online retail behemoth. There was a speculation that Amazon will not dilute its holding in either of the companies and the companies will continue to operate as whole seller entities. But putting speculations to rest, Cloudtail decided to rejig it’s shareholding in order to become compliant with the new guidelines. NR Narayana Murthy’s Catamaran Ventures has increased its stake in Cloudtail’s parent company Prione Business Services to 76% from 51% earlier, reducing JV partner Amazon Asia’s stake to 24% from 49%.

Walmart owned Filpkart: Flipkart, on the other hand, had WS Retail, a company initially controlled by promoters Sachin Bansal and Binny Bansal, as its largest seller. At one point in time, it contributed close to three-fourth of Flipkart’s sales. The promoters, however, spun off WS Retail and exited the company – at least, to comply with the letter of the law. WS Retail is still the largest seller on the Flipkart platform. WS Retail is now an independent seller like any other seller, fulfilling the requirements laid down by the amendment.

Moreover, in an anticipated turn of events on February 2, a day after the enactment of the revised guidelines, Walmart’s share price fell by 2.06% to $93.86 on NYSE, losing $5.7 billion (more than INR 400 billion) in market capitalization.

Further, Flipkart-owned fashion ecommerce company, Myntra, has reportedly clarified that it does not own any equity stake in sellers on its platform, as it continues to sell brands through third-party merchants.

Conclusion:

Changes in the governing laws of a country always brings out the contingencies that a business has to overcome in order to achieve the greatest of the success. In a country where 90% of the retail sector is unorganized, changes in the law and legal advancement paves the way for better enforceability and a level playing field that controls the market disruption and brings about the opportunities for offline retailers. Change in FDI policy had some intermittent effects on the market and major online players but there is a possibility that this negative effect will wear off in the long run and the online market place will come back to heavy discounts and offers.

(For any feedback, suggestion, or query Email at: sourabh.virmani1@gmail.com)

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