Govt allows 100 percent FDI in marketplace e-commerce, but that's not the real news

As per the guidelines issued by the Department of Industrial Policy and Promotion (DIPP) on FDI in e-commerce, foreign direct investment (FDI) has not been allowed in inventory-based model of e-commerce. We believe that is the real piece of news.


The government has permitted 100 percent FDI in the marketplace format of e-commerce retailing with a view to attract more foreign investments. Now, the government has already allowed 100% FDI in business-to-business (B2B) e-commerce. As per the guidelines issued by the Department of Industrial Policy and Promotion (DIPP) on FDI in e-commerce, foreign direct investment (FDI) has not been allowed in inventory-based model of e-commerce. And, that seems to be the real piece of news.

At present, global e-tail giants like Amazon and eBay are operating online marketplaces in India, while homegrown players like Flipkart and Snapdeal have foreign investments even as there were no clear FDI guidelines on various online retail models. To bring clarity, the DIPP has also come out with the definition of 'e-commerce', 'inventory-based model' and 'marketplace model'.

The guidelines define the marketplace model of e-commerce means providing 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 inventory-based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to consumers directly, the guidelines define. Not allowing FDI on the inventory-based model effectively restricts the entry of retail giant Walmart, unless of course if it wants to rethink its business model and set up a marketplace for India or go around investing in or even acquiring smaller e-commerce marketplaces. On the other hand, Chinese e-commerce biggie Alibaba CEO Jack Ma could go all out, all dragons blazing, preparing to make way into the India market. Alibaba has already made investments in Paytm and Snapdeal, and has been giving clear indications that they would like to build their own business here too.

Back at home, Snapdeal's Kunal Bahl has tweeted out a positive response, while Flipkart and Amazon have been silent as disallowing foreign investment in 'inventory model' could reportedly make matters worse for both.

Another important clause in the guidelines says that an e-commerce firm will not be permitted to sell more than 25 percent of the sales affected through its marketplace from one vendor or their group companies. Reacting to the announcement, NASSCOM, the trade association of Indian Information Technology and Business Process Outsourcing industry, says that limiting sales of a vendor to only 25 percent of the sales in the marketplace may prove to be restrictive, more so if the vendor sells high value items. "The industry might face difficulties in case of sale of electronic items, where a vendor maybe offering exclusive access to certain items or discounts. Marketplaces have no control on how a product is priced and only organize ‘sales’ where vendors participate. This offers consumers with a variety of choices and also attractive prices, we hope that such consumer friendly practices similar to ‘sales’ being offered by retailers will not be restricted," says NASSCOM in a statement.

So, does that mean no more lucrative discounts? There is a clause in the guidelines that mentions that 'e-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.' Now, India's top e-commerce players thrive on the competitive discounts that they offer not only amongst each other, but also manage to outdo offline stores. This clause might mean the end of deep discount days such as Flipkart Big Billion Day sale and Amazon's Diwali sale.

The e-commerce industry seems to have received the news pretty well, especially the clarity on the marketplace model. Sanjay Sethi, CEO & Co-founder, ShopClues says, “100 % FDI in e-commerce is a great initiative for the marketplace format of e-commerce retailing as it will help attract foreign investments in the country. It will be beneficial for consumers and will help in supporting the vision of Make in India as well and also create more job opportunities in the country. The clarity of the definition of e-commerce and marketplace model categorically will allow many players (national and international) to enter the industry through marketplace route."

On the same lines, NASSCOM also says it is glad to see the reiteration of FDI policy ‘as is’ on the services sector, and also on sale of services through ecommerce. “Add-on services like order fulfillment services that are offered to independent third party sellers on the platform can also be offered such entities. This will also help in ending certain misinterpretations and confusions occurring in the domain. It is also heartening to note that the government has clarified that the responsibility for products sold will rest solely on the seller, thereby clarifying the intermediary status of such marketplaces," adds NASSCOM in the statement.

Sandy Shen, Research Director at analyst firm Gartner also perceives this to be a positive development for the e-commerce industry. "It makes it easier for all players, global and local, to compete online, and by clearly defining certain rules of the game e.g. pricing. However, this will not reduce the level of competition in the market where the players are still in a land-grabbing mode to increase the number of customers and merchants. They are likely to use various ways to make their platforms more appealing such as by providing better logistics, payment and purchase experience, and better support to merchants. Price pressures will continue to exist for merchants as that’s a primary reason that motivated people to shop online. Even when marketplaces are not allowed to influence the pricing, there are still levers they can use,” Shen explains.

However, Forrester Forecast Analyst Satish Meena doesn't seem impressed and says that this news doesn't shed light on anything new if you consider the policy. "Good to see that the government giving clarity defining the industry. However this is status quo in terms of policy as 100% FDI was already allowed in marketplaces. This clear definition by the government removes the doubts and makes things more transparent for foreign investors.This will certainly help more investment in marketplaces as not every investor is confident about putting money through loopholes. So this is good news for the top marketplaces looking for more funds to grow the business as they can approach new set of investors who were waiting for a clarification from the government," says Satish. He also highlights the lack of clarity around the inventory-led model and shares why he thinks the customer might get the short end of the stick. "The other troubling part is shifting the responsibility of delivery goods to the customer and customer satisfaction is moved to the seller instead of marketplace which is not a good news for customer," reasons Satish.

Now only time can tell what repercussions the Indian e-commerce scene faces – will it be big fish eat small fish or dog eat dog. But one thing is clear, change is coming.

With inputs from PTI


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