New FDI norms for e-commerce: Comprehensive policy applicable to foreign, domestic players need of the hour

Towards the end of December 2018, the government came out with clarifications on the existing foreign direct investment (FDI) policy on e-commerce. As per a press note by the Department of Industrial Policy & Promotion (DIPP), the clarification was done with the intent to ensure that e-commerce players/marketplaces do not influence the sale price of the goods sold on their portal. According to the government, if an entity is controlling the inventory sold on its portal, not only is it violating the FDI policy on e-commerce but also the FDI policy on multi-brand retailing. With these concerns in mind, the following clarifications (which come into effect from 1 February 2019) were provided by the government: To keep a tab on inventory ownership, it has been mandated that an e-commerce platform cannot purchase more than 25 percent of the total value of goods (of the vendor) from a single vendor/its group of companies. In other words, a vendor can only sell 25 percent of its total goods by value to a single e-commerce player. [caption id=“attachment_2620130” align=“alignleft” width=“380”] Representational image. Thinkstock[/caption] • Any entity that has an equity participation by an e-commerce player cannot sell its products on the platform that is run by such an e-commerce player. • E-commerce players need to engage equally with all vendors listed on its platform and not provide special benefits to specific vendors. Under the clause, provision of special services/terms to a specific vendor which are not available to other vendors on the platform (in similar circumstances) will be considered discriminatory and unfair. • E-commerce players cannot mandate any vendor to sell goods on their platform exclusively. Also, cash backs by the e-commerce player/its group companies should be fair and non-discriminatory. The policy clarifications have been provided with the intention of protecting small and medium scale players and provide a level playing field, however the timeline of 1 February that has been set for implementation might not give sufficient time to players to realign their business models with the change. Also, the provision that an e-commerce player cannot have any equity stake in an entity that sells on its platform will come as a setback to the major e-commerce players, which have subsidiaries/group companies that they have invested to improve the predictability of their supply chains. It could be difficult for the e-commerce players to rely on small/medium scale individual players for large scale deliveries. This in turn could be detrimental to their brand equity, promised delivery timelines and supply chain predictability. Also, the provision that a vendor cannot sell more than 25 percent of its goods by value to a single marketplace will impact price points as buying in bulk from a single vendor allows for better pricing and uniformity in quality. Not only will it impact the pricing and quality for the marketplace, but also pose operational issues for vendors that only survive on selling their goods online.

The 25 percent norm will imply that a vendor needs at least four marketplaces for offloading the entire inventory. Also, the inventory of a vendor will deem to be controlled by a marketplace if it purchases more than 25 percent goods of a vendor. This indirectly places the responsibility on the marketplace to ensure that it does not purchase more than 25 percent of the total goods of a vendor, which will pose unnecessary operational and compliance issues for the marketplace.

While there was ambiguity around the impact of the decision on the food retailing business, a press note on 3 January by the government clarified that there was no change in the food retail trading policy which permits 100 percent FDI under approval route, including through e-commerce. Also, the press note clarified that there was no prohibition on sale of private labels on these marketplaces. However, since most of these private labels are owned by the e-commerce entities, hence, further clarity on the same would be needed on how these labels can continue being sold on these portals in the wake of the equity stake restriction.

Though the intent of these provisions is to ensure that there are no circumvention around the existing policy (specially to gain entries into multi-brand retail); however, some of these provisions could seemingly be restrictive. Also, instead of restricting the percentage of goods that can be bought from a single vendor, placing some norms for these vendors to engage in domestic sourcing might be more meaningful.

Not only will it be beneficial for local vendors and the economy but will also allow the strategic relationship equation to thrive; which is the foundation on which retail trade around the world rests on. Also, there needs to be more thought around the point put forward on exclusive sale/launch by a brand on a platform. Some brands (even in offline retail) prefer an exclusive arrangement with a specific partner due to favourable business terms and to create the right buzz around its product. Today, e-commerce accounts for about 2-3 percent of the total retail trade in India; but as is true in economies across the globe; it will gain traction in the coming years. To ensure a level playing field, there is a need for a comprehensive e-commerce policy applicable to both foreign and domestic players, rather than only a policy for FDI in e-commerce. Benefits that these foreign players bring to the table — investments in modern warehousing, improvements in supply chain and logistics and widening the market base shouldn’t be ignored while arriving at a policy that will not only impact online trading, but also have a bearing on the overall economy. (The writer is chairman & CEO, India, South East Asia, Middle East and Africa, CBRE)     To keep watching India’s No. 1 English Business News Channel – CNBC-TV18, call your Cable or DTH Operator and ask for the Colors Family Pack (inclusive of 24 channels), available for Rs. 35/- per month, or subscribe to the channel for Rs. 4/- per day. To keep watching the Leader in Global Market & Business News – CNBC-TV18 Prime HD, call your Cable or DTH Operator and ask for the Colors Family HD Pack (inclusive of 25 channels), available for Rs. 50/- per month, or subscribe to the channel for Rs. 1/- per day.