A discussion paper released by the commerce ministry on the draft policy for e-commerce has led to more confusion in regard to the role of foreign direct investment [FDI] in Indian retail. At the outset, let us take a look at a major policy announcement in 2016-17 regarding e-commerce – commonly referred to as Press Note [PN] 3.
The guidelines notified vide PN-3, allow 100% FDI in the so called ‘market-place’ model for e-commerce – an IT platform where sellers and buyers conduct transactions. An e-commerce company working on this model merely acts as a facilitator by offering to them services such as booking order, raising invoice, arranging delivery, collecting payment, stocking goods etc. It does not own stocks and can’t sell directly to consumer.
The FDI in market-place is subject to certain riders. An e-commerce firm can enter into transactions with sellers registered on its platform on business-to-business basis. However, it cannot sell more than 25 per cent of its total sales from one vendor or its group companies. It can’t directly or indirectly influence the sale price of goods or services and shall maintain level playing field.
However, for an e-commerce company owning stocks and undertaking direct selling to the consumers [also referred to as ‘inventory’ based model], FDI is prohibited.
The dividing line between the two models is very thin, only differentiating factor being ‘ownership’ of the stock. If, an entity engaged in direct selling [that is where the real meat is] can demonstrate that it is operating on ‘market-place’, then it can be eligible for FDI [albeit 100%]. For this, all that it needs to do is to show that it does not own the stock [e.g. it can register a couple of its group companies as vendors/sellers].
In short, FDI in retail on e-commerce platform is permitted albeit through the backdoor. A rider ‘the entity cannot sell more than 25 per cent of sales from one vendor or its group companies’ is hardly any deterrent to prevent misuse. As regards, ‘it can’t influence the price’ [vide discounts or otherwise], this condition is being flouted with impunity even as the authorities look the other way.
How does the discussion paper modify/change the extant policy dispensation? It has proposed 49% FDI in online marketplaces that hold inventory and sell directly to consumers. However, this is subject to only 100% made-in-India products being sold through such platforms. Further, the platform must be promoted by resident Indian and controlled by Indian management.
Considering that online marketplaces those sell directly to consumers are already enjoying 100% FDI [de facto], the new proposal is hardly any attraction. That apart, a cap of 49% on foreign equity with majority equity and management control resting with Indian resident would make it a non-starter. The condition of the platform selling 100% local products acts as a further deterrent.
In 2016-17, the government had announced 100% FDI in food retail – both offline and online – subject to retailer selling only locally procured food and investing in back-end infrastructure. The riders have deterred foreign investors even as proposals worth only US$ 1 billion [half of it by Amazon] have so far been approved. A further clarification by commerce ministry that the entity will have dedicated warehousing for food has added to policy uncertainty.
When, 100% FDI in food retail has not enthused foreign investors, it is unlikely that a much lower 49% FDI in online retail [for local products only] would generate any interest.
The scenario in regard to FDI in offline retail is no better. Under the extant policy [in vogue since 2012], 51% FDI is allowed subject to minimum investment of US$ 100 million [50% of this in building back-end infrastructure], 30% local sourcing from small and medium enterprises [SMEs] and prior approval of the state. These riders have virtually barred FDI in this segment.
With so many policies addressing different segments and each coming with different set of riders, there is total chaos. It has left all stakeholders disgruntled and pitted them against each other.
Those in offline retail feel that with only 51% FDI, they are unfairly treated vis-à-vis online players who can manage up to 100%. Indian companies have a grudge that 49% FDI in online retail is against PN3 which bars foreign investment. Foreign majors protest that they will be barred from stocking inventory [they own much more than 49 % in their Indian units] while their rivals with 49% or less FDI will be able to sell directly to Indian consumers.
Even for the marketplace [it happens to be the darling of foreign investors], the draft policy has added fresh conditions. Thus, the discount will be ‘capped’ and made ‘uniform’. Further, there is a sunset clause to prevent discount being given beyond a certain date. There will a regulator to enforce the provisions of PN 3. Besides, a separate wing will be created in the Enforcement Directorate [ED] to handle grievances related to its implementation.
This tantamount to return of the ‘license raj’ in which the bureaucrats will rule the roost. There will be nepotism and corruption as the officials will get lot of discretionary powers. Only those who devote time to managing the officials will stand to gain.
Are we going back to an era that existed three decades back? Why is the government hell bent on shackling a sector [read: retail] which has huge potential for growth and creation of jobs?
The problem is with a mindset driven by the fear [baseless] that FDI in retail will kill the ubiquitous ‘mom-and-pop’ stores and hence, politically catastrophic. This prompted the government to bar FDI in offline retail and then, in online retail too [read: inventory model]. Yet, keen to get FDI, it allowed 100% vide back door.
Realizing that this can’t sustain for long, it opened up food retail and now talking of direct selling under marketplace. And, to prevent cross-hair with protagonist of ‘mom-and-pop’, it is putting up all sorts of riders. This must end.
Team Modi should bring a ‘uniform’ policy to allow 100% FDI in retail irrespective of whether it is online or offline; food or non-food; marketplace or direct selling etc. This will create a level playing field for all stakeholders, give a big push to capital inflow, fill the existing void in logistics/infrastructure and create jobs.