The global e-commerce majors have been in the news, yet again, for violating norms for foreign direct investment [FDI]. The Confederation of All India Traders [CAIT] has complained to the government that Amazon, Flipkart are giving huge discounts, selling exclusive brands [including their own] and controlling inventory of sellers etc – all of which is prohibited under FDI policy.
Under the guidelines on FDI in e-commerce [issued in 2016-17, Press Note 3], 100% FDI is permitted in the ‘market-place’. The market-place is a platform where sellers and buyers meet to conduct sale and purchase transactions even as the owner of market-place [read: e-commerce company] merely acts as a facilitator. It can provide services such as book orders, raise invoice, arrange delivery, accept payments, provide warehousing support etc but can’t own and control inventory. Put simply, neither itself nor vide its subsidiary or a joint venture with Indian partner, it can undertake ‘direct selling’.
Those guidelines were vague; these did not clearly define as to what constitutes ‘ownership’ and ‘control’ of the inventory. The e-commerce majors exploited this vagueness to get into ‘direct selling’ which was contrary to the policy intent. As such, the government agencies [read: ministries of commerce and industry, corporate affairs and Enforcement Directorate (ED)] could not conclusively establish that there was violation of the regulations.
Vide a circular issued on December 26, 2018, department for promotion of industry and internal trade [DPIIT] in the ministry of commerce and industry issued clarifications to the above guidelines. Despite this, some vagueness still persists.
For instance, a seller on e-commerce platform can’t have more than 25% of its inventory from any company connected with the latter. What is the sanctity of the 25% threshold? Is there a need of letting the seller source even one unit of the product from the e-commerce company or its subsidiary or a joint venture [JV]? To let this happen [this is precisely what the stipulation amounts to] will be inconsistent with the spirit of the policy.
There is ambiguity on the ownership of the seller/entity. Does it mean that the owner of e-commerce platform or its subsidiary or JV can’t hold even 1% share in the selling entity? Or any level less than majority shareholding of 51% should be good enough? If, authorities go by the second interpretation then, this will tantamount to letting the market-place have control over the seller; hence, violate the policy intent. Disingenuous bureaucrats have given to e-commerce majors a free hand by deciding not to set up a regulator and are merely content with an inter-ministerial committee to monitor.
The foreign majors have not taken kindly to even minor tweaking of the guidelines [December 26, 2018 circular]. They have described this as ‘retrospective’ changes in the policy which they allege, will send a wrong signal and affect FDI.
The government is thus sand-witched between the small traders on one side and e-commerce majors on the other. While, traders think that it has given a free run to e-commerce giants, the latter opine that it is changing the rules mid-way thereby making the policy environment unstable. Even the consumers who are the beneficiaries – as they get their stuff at discount besides the convenience of buying – may not get sustainable benefits in the medium to long-term.
This is because the current policy regime gives an edge to e-commerce majors vs millions of small traders [despite stated intention of helping them by expanding markets] and if allowed to continue this could lead to the former spreading their tentacles far and wide to the detriment of the latter. Over time, we can’t rule the possibility of these major players not just doing away with discounts but also raising prices exploiting their monopolistic position. As the adage goes, there are no ‘free lunches’. If, the likes of Amazon and Flipkart today are burning money [a jargon for deep discount] to establish their foothold in the market, there is reason to believe that in future, they would fleece the consumers by charging exorbitant price when they don’t face competition.
That apart, they are indulging in other irregularities. For instance, the moment a consumer places an order, the consideration [price minus discount] amount is immediately debited from his bank account and concurrently credited to the account of e-commerce company say, Amazon. This is normal for processing of the order to be kicked off. But, very often, Amazon sends a terse message ‘payment failed’.
Such a message is abhorrent particularly when seen in juxtaposition with immediate debit of the customer’s account. How despite receipt of money in its account, the company can claim ‘payment failed’? To argue that it didn’t receive the money is untenable as then, the bank would not have debited customer’s account. Having taken the stance ‘payment failed’ [untenable], the company decides not to process the order but sends another message that ‘the money will be refunded’ within a week. This again is anomalous as unless the money is received in the first place, how can it be refunded.
True, the customer gets the refund after a week. But, it comes at heavy cost. First, his cash gets blocked without earning any interest; correspondingly there is gain to the company. Second, he is deprived of the discount which is available only for the relevant period of sale. Third, look at the time and money he has to spend on interacting with the bank and the company to get the refund.
The government should immediately go on a correction course. The ‘payment lapses’ issue is simpler to deal. The Reserve Bank of India [RBI] should address this in close coordination with banks and the ministry of finance [MoF]. As for the violation of FDI norms, this has to do with an inherent flaw in the policy regarding e-commerce in particular, the ‘market-place’ model.
No foreign major will be interested in merely providing support services if he is not allowed to undertake direct selling to consumers [where it can hope to make good profit]. Yet, if Amazon/Flipkart et al are here, it is because they have been let in albeit through the backdoor. So, the way forward is to allow foreign investment from the ‘front door’. The government should shun ‘market-place’; instead, allow 100% FDI in retail – for both online and offline [herein at present, 51% FDI is allowed subject to several riders which is as bad as prohibiting it] in all sectors without any discrimination or favor [currently, 100% FDI is permitted in food only subject to conditions].
This will create a level playing field for all stakeholders. It will provide stability of the policy environment. It is in the best interest of millions of small traders as it will lead to all round development of the infrastructure and wide range of choice for sourcing products instead of the current lop-sided growth that centers around a few players and limited product choices. Finally, it will be pro-consumer in the long-run with many players catering to their needs at competitive price and minimizing risk of exploitation.