Recently, a task force [TF] on e-commerce under the then commerce secretary, Rita Teaotia had recommended 49% FDI [foreign direct investment] in Indian retail in online marketplaces that hold inventory and sell directly to consumers [B2C]. 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.
This had led to consternation among Indian companies in the organized retail such as Reliance Retail Limited [RRL], Futures Group etc who opined that this would violate guidelines as encapsulated in Press Note [PN] 3 [2016-17] which bars foreign investment in B2C. The foreign majors operating in on-line market place viz. Amazon, Flipkart etc also protested arguing that with majority holding in their Indian units while, they will be barred from stocking goods, their rivals with FDI < 49% will be able to sell directly to Indian consumers.
The widespread protests have prompted the policy makers to beat a hasty retreat with the secretary, department of industrial policy and promotion [DIPP], Ramesh Abhishek announcing – about a month back – that the government has no plans to ease rules to allow FDI in the inventory model even if the platform intends to sell 100% made-in-India products.
The TF could not be so naïve that it was unaware of the implications of its recommendation. So, what prompted it?
The PN 3 allows 100% FDI in the ‘market-place’ model for e-commerce. An entity working on this model offers a platform to sellers and buyers to conduct transactions. It merely acts as a facilitator by offering them services such as booking order, raising invoice, arranging delivery, collecting payment, stocking goods etc. It can’t own stocks and can’t sell directly to the consumer. However, for an entity owning stocks and undertaking direct selling to the consumers [‘inventory’ 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. This is easily done. It can register a couple of its group companies as sellers.
Purportedly to prevent misuse, the guidelines put some riders. The market-place entity can’t permit more than 25 per cent of total sales on its platform from one vendor or its group companies. Further, it can’t directly or indirectly influence the sale price. But, those riders are hardly any deterrent. For instance, 25 per cent sale per vendor is a very liberal bar! As regards influencing the price [via discount or otherwise], this condition is being flouted with impunity even as the authorities look the other way.
In short, FDI in retail on e-commerce platform is already permitted albeit in the garb of market place. It is for this very reason that MNCs have shown unprecedented interest. A global giant such as Walmart would not have invested a massive US$ 16 billion for a controlling stake in Flipkart without an opportunity to be in the business of direct selling to consumers.
Having let them in and ever keen to ensure that foreign capital stays, the government is working on ways and means to lend a semblance of legitimacy to the inflows. So, in the budget for 2016-17, it announced 100% FDI in food retail – both offline and online – subject to retailer selling only locally made food. Further, in a bid to cover the entire retail landscape, the TF has now come up with the idea of 49% FDI in online retail.
But, these are half-hearted proposals coming with a plethora of riders. These were prompted by a mindset based on the fear [baseless] that FDI will kill the ubiquitous ‘mom-and-pop’ stores and hence, politically catastrophic. These moves per se have failed to enthuse foreign investors. The earlier attempt to allow FDI in offline retail [read: 2012 policy decision to allow 51% FDI subject to minimum investment of US$ 100 million and 30% local sourcing] was also stymied by this mindset.
The only thing that has enthused investors thus far is PN-3 regarding FDI policy on e-commerce. There was an urgent need to rationalize the guidelines, remove the artificial distinction between ‘market-place’ and ‘inventory’ to ensure that foreign investment comes from the front door. Unfortunately, far from that, the TF has sought to further make the policy environment messy.
It has mooted a fresh set of conditions viz. ‘capping’ of discount, making it ‘uniform’, inserting a ‘sunset clause’ [fix a date by when the discount will end], setting up of a regulator to implement the provisions of PN-3 and enhanced role for the Enforcement Directorate [ED] to look into alleged issues of money laundering. This will tantamount to return of the ‘license raj’ in which the bureaucrats will rule the roost.
The government is seeking to regulate and mount surveillance in an area [read: FDI in retail] which happens to be the most promising area and wherein, the opportunities for growth – propelled by foreign investment – are phenomenal. It should shun treading this dangerous path and instead, aim at unshackling the sector and putting in place a conducive policy environment.
It 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.
However, for this to happen, Team Modi will have to get rid off its innate sense of fear that wholesome and unfettered FDI in retail will be detrimental to the ‘mom-and-pop’ stores.