100% FDI in e-commerce marketplace: If discounts are restricted, sector will never be the same

The Narendra Modi government on Tuesday allowed 100 percent FDI in e-commerce market place model under automatic route, which has been hailed as one of the major reforms yet in the retail sector by the NDA government.

Is this indeed so?

Here's a decoder of the policy:

00% FDI in e-commerce marketplace: If discounts are restricted, sector will never be the same" width="380" height="285" />What the guidelines say?

The press note issued by the Department of Industrial Policy and Promotion essentially says two things:

1) 100% FDI under automatic route is permitted in marketplace model of e-commerce

2) FDI is not permitted in inventory based model of e-commerce.

Apart from this, it gives a few definitions:

E-commerce means buying and selling of goods and services including digital products over digital and electronic network.

Inventory-based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entiry and is sold to the consumers directly.

Market place model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

What is the big change the guidelines bring about?

Frankly speaking, nothing much from the FDI policy front. For one, e-commerce companies are already operating market place model and most of them have significant foreign investment. As this VCCircle article says, the government has just formalised the foreign investment in e-commerce and is continuing with the policy not permitting these companies to sell directly to the consumer.

In other words, the big change on the FDI policy front would have been allowing FDI in inventory model. That is what Amazon has been lobbying with the government for. The global giant had earlier said that it wants to do a hybrid model of both remaining as a platform and also sell directly to consumer. With the new guidelines not allowing FDI in inventory based model, this is not going to happen.

Then why are the guidelines being hailed as a major step forward?

Because it rings in clarity in a sector where there was none. "The announcement brings about the long overdue clarity on FDI policy, specifically the much debated marketplace model," says Akash Gupt, Partner and Leader Regulatory, PwC.

"There was a lot of ambiguity in the sector," concurs Anil Talreja, partner, Deloitte Haskins & Sells. "The government has given good guidance and clarity to the business model. This is the foundation for all other regulations and laws. It provides an indirect clarity on tax provisions for the sector," he says. Taxing of the sector has been a major bugbear for the companies, who have engaged in court battles with various state governments. Now, the new guidelines could pave the way for clear tax laws.

But will the guidelines settle the feud between the online and offline retailers?

Cannot say. For one, offline retailers are happy. The reason is a clause in the guidelines which restricts pricing. "E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain level playing field," the press note says. In other words, this clause will restrict the freedom of the e-commerce companies to offer deep discounts to buyers. Remember, Flipkart et al have been wooing customers with discounts that offline retailers are finding difficult to match.

Kishor Biyani and his ilk, who have been complaining about this to the government and even gone to the Delhi High Court, are very happy about this. “This could force online players to change their model as predatory pricing will no longer exist,“ Kishore Biyani, Future Group CEO, has been quoted as saying in a report in The Times of India.

In other words, there is enough for online retailers to say that the government has genuflecting before the offline retailers' lobby.

However, the VCCircle article rightly points out, how will the government "monitor indirect discounting as the products sold on the marketplaces are legally sold by multiple vendors". "Discounts are inbuilt in the pricing and at times, through vouchers, billed as a marketing cost," it notes.

Whatever happens to the online-offline battle, one thing is for sure - this will help the online retailers which have been bleeding themselves to sell at discounts. "While on one hand the policy clearly mentions that 100% FDI is permitted in online marketplace, it also lays down operational guidelines to ensure the window is not misused," says Akash Gupt of PwC.

What is the way forward for the sector?

Most of the players have welcomed the guidelines.

However, there is one clause that is likely to force companies like Flipkart to go back to drawing board.

"An e-commerce entity will not permit more than 25% of the sales affected through its marketplace," says the guidelines.

This means that Flipkart will have limit sourcing of products for sale from WS Retail, in which it holds majority stake. According to the article in VCCircle, this policy likely to be restrictive for the companies.

Flipkart has not yet commented on the guidelines.

"The cap of 25% on sales by a vendor on marketplace will ensure a broadbasing of vendors for a true marketplace. This may require some of the operators to go on drawing board to comply with the conditions," says Akash Gupt of PwC.

What happens to the much talked about consolidation in the sector?

This is unlikely to take place. According to Deloitte's Anil Talreja, much of these talks were a result of the distress in the sector. "A lot of distress in the sector is likely to get cleared now and everybody will operate in their own space," he says.

All in all, though the government skipped the real reform in the sector by not permitting FDI in inventory-based model, the guidelines indeed are a step forward in providing clarity to a thriving sector.

And this is very important given the job creation potential of the sector. Gurcharan Das in an earlier ToI blog had estimates that the sector will create 20 million jobs in the country by 2020, when the sector is expected to see $19 billion in sales and have 1.3 million sellers. "Each seller (on an e-commerce site) creates four direct jobs and 12 indirect jobs in warehousing, delivery, and support services," he notes.

Given the clarity that has emerged in the sector with the policy, this estimate is likely to be on the lower side.

As Akash Gupt notes: "This sector has attracted maximum FDI in the year 2015. With the clarity in policy and given the potential of Indian market, this policy initiative will certainly attract more FDI into the country. Enabling the marketplace operator to provide value add services like warehousing, delivery, payment processing etc will improve customer experience and market outreach for small and medium size suppliers."

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Updated Date: Mar 30, 2016 10:14:58 IST

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