The Indian retail industry has emerged as one of the most dynamic and fast-paced industries due to the entry of several new players. It is not only a form of business but more a mode of earning of livelihood for tens of millions of people in the Country. India’s e-commerce market has witnessed a phenomenal growth in the past recent years and is still flourishing. Foreign Direct Investment in E-Commerce in India can lead to an influx of capital, further enhancing its growth potential. India is estimated to become the 3rd largest consumer economy by 2025 (consumption expenditure to increase 3 times to reach $4 trillion).
Factors that make India so attractive include the second largest population in the world, a middle class of 600 million people, increasing urbanization, rising household incomes, connected rural consumers and increasing consumer spending.
The new FDI rules in e-commerce effective from February 01, 2019 are aimed at safeguarding the interests of offline retailers.
The FDI policy in India allows e-commerce activities under automatic route with 100% equity, subject to below primary conditions:
Let’s understand some relevant terms as below for more clarity:
The recent FDI norms bar exclusive tie-ups between e-commerce firms that follow the ‘marketplace model’ and vendors using their platform. In a marketplace model, the e-commerce firm is not allowed to directly or indirectly influence the sale price of goods or services and is required to offer a level playing field to all vendors.
To emphasize this point, the new norms said cashback or services, such as quick delivery, offered by e-tailers must be applicable to all vendors on their platforms. It also said that if a vendor sells more than 25% of its wares through an e-commerce marketplace, the latter will be deemed to have an inventory model, in which FDI is not allowed. Further, the onus of ensuring it is firmly on the e-commerce platform, so that it does not find itself on the wrong side of the law.
However, the Department of Industrial Policy and Promotion (DIPP) updated Press Note 2 (2018 series) to provide clarity on the functioning of an e-commerce marketplace as below:
Subject to the conditions of FDI policy on services sector and applicable laws/regulations, security and other conditionalities, sale of services through e-commerce will be under automatic route.
E-commerce companies, such as Amazon and Flipkart, have been luring customers with deep discounts and exclusive offerings. Offline traders have been complaining that e-commerce platforms with access to FDI are able to give deep discounts and other incentives through related-party vendors, which they cannot match. Most customers shop online for deep discounts and exclusive offerings, which may not be available on other online platforms, or in offline stores. This will, in turn, have an impact on the revenue and growth of e-commerce companies in India.
The bar on such firms ‘influencing’ pricing and mandating vendors to sell exclusively on their platforms may have a major impact on customer behavior.
The changes in FDI policy are significant as its enforcement will affect the flexibility that e-commerce platforms had in doing business and force them to be neutral to all vendors. It will also have an impact on private labels being sold by e-commerce companies.
About the Author
Author is Neeraj Bhagat, FCA helping foreign companies in setting up and closure of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants; a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi.