Economic liberalisation worked well for e-commerce sector; now govt has taken a step back with new guidelines

  • Earlier, the FDI policy with respect to e-commerce was liberal in its approach

  • New rules display an unwarranted attempt to micromanage the e-commerce industry

  • This amendment bars Indian manufacturers and sellers from effectively competing in the global online marketplace

The most talked-about issue which shook the e-commerce industry recently is the implementation of the press note 2 of 2018 by the Department of Industrial Policy and Promotion (DIPP). By virtue of this press note, several restrictions are imposed on the e-retailers which hitherto were never contemplated by the e-commerce industry.

The press note has recently come into effect on 1 February, 2019. The specific restrictions imposed on the e-commerce entities are in relation to directly or indirectly influencing the sale price of goods or services. The press note further directs these entities to maintain a level playing field. Other directions in relation to fair and non-discriminatory cashbacks, etc., have also been covered in the press note. In addition to this, the e-commerce entities will have to also ensure that any services (such as logistics, warehousing, fulfilment, etc.) provided by them or, any other entity in which such marketplace entity has direct or indirect equity participation are fair and non-discriminatory and, on an arms-length basis.

In the wake of the current regime of liberalisation in e-commerce trade adopted by the government for more than a decade now, such a step by DIPP is restrictive. It displays an unwarranted attempt to micromanage the e-commerce industry. Additionally, this amendment bars Indian manufacturers and sellers from effectively competing in the global online marketplace. To substantiate this fact, we can trace the history of FDI in e-commerce in India.

 Economic liberalisation worked well for e-commerce sector; now govt has taken a step back with new guidelines

Representational image. Thinkstock

Earlier, 100 percent FDI was allowed under the automatic route in e-commerce activities provided that such entities only engage in Business to Business (B2B) e-commerce and not in retail trading. Thereafter, press note 3 of 2016 was issued by the DIPP on 29 March, 2016 introducing various definitions viz. e-commerce, inventory-based model of e-commerce and marketplace model of e-commerce. E-commerce was defined as 'buying and selling of goods and services including digital products over digital and electronic network'.

Further, the inventory-based model of e-commerce was defined as an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly. The marketplace-based model of e-commerce meant providing an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between the buyer and seller. Also 100 percent FDI under automatic route was permitted under the marketplace model of e-commerce.

One essential condition which was clearly mentioned was that under the marketplace model of e-commerce, any entity which is engaged in e-commerce activities could not own the products they sell on the platform. The very reason for imposing such a restriction was on the basis that exercising ownership over goods purported to be sold would lead to the business becoming an inventory-based model wherein FDI was and still is specifically prohibited.

Analysing the earlier provision, it can be clearly inferred that the FDI policy with respect to e-commerce was liberal in its approach. Every year the new policy or press note issued pursuant to the extant FDI Policy was aimed at liberalising investment in the e-commerce sector and to open the e-commerce market for foreign players. The move to liberalise the FDI policy by allowing the sale of services through e-commerce under automatic route was welcomed as a very positive and progressive move by the industry.

The new e-commerce rules bar e-commerce entities from selling products by those vendors in which these entities have an equity interest and prohibits the e-commerce entities from making deals with sellers to sell exclusively on their platforms. The impact of this was realised on the websites of various e-commerce players like Amazon India wherein items sold by the vendors such as Cloudtail were withdrawn from the marketplace. Similarly, various items of clothing from related companies like Shopper's Stop chain were also immediately stopped owing to the same fact.

Amazon India's own range of Echo speakers alongwith home utility brands like Solimo and Presto and other Amazon Basics products like batteries, laptop stands, and other electronic items were also removed from the official website. This is seen as a major disruption in the business of Amazon India and one can presume that similar actions were undertaken by other online retailers operating as a marketplace model in order to comply with the new regulations. Given the fact that Amazon India committed to investing $ 5.5 billion in the Indian market and Walmart has already invested over $16 billion in Flipkart, these new rules will result in major rejig to their business models.

This move to restrict marketplace entities in relation to sale prices, cashbacks and barring entities from selling products of certain vendors is retrograde from the economic standpoint as well. For the past few years the e-commerce industry was moving forward due to economic liberalisation.

India has been a major hub for e-commerce with various entities ready to tap into the sector and invest in the same, but given the fact that major players like Flipkart, Amazon India are slated to incur losses, investments in the Indian e-commerce market are evidencing a slump owing to the new rules and its implementation.

Even from the consumer standpoint, such a policy move restricts access to a range of sophisticated products which are otherwise unavailable to most of the consumers at competitive prices especially in Tier II cities in India. Moreover, there is a lack of sufficient guidelines in terms of various aspects within the press note itself. For instance, the terms like ‘arm’s length basis’, ‘fair and non-discriminatory’, ‘level playing field’ etc. have been used in the press note without enough policy guidelines in that context. Hence, it’s not an exaggeration to say that the step taken by the government in relation to the new FDI Rules in e-commerce are not in line with the progressive regime taken up in this sector so far.

(Narayanan is Partner and Pande joint partner, Lakshmikumaran & Sridharan Attorneys)

Updated Date: Feb 11, 2019 12:31:03 IST