An announcement of foreign direct investment [FDI] in India is normally welcome in recognition of its contribution to capital formation, accelerating growth and adding to our foreign exchange kitty. Deviating from this normal practice, last month, the union minister for commerce and industries, Piyush Goyal was dismissive about the decision of Amazon boss to bring a few billion dollars to India. Goyal meant that Jeff Bezos was bringing money to make up for the huge loss the company was incurring on its operations in India.
Losses or gains are intrinsic to any business. So, what was so special about the terse observation by the minister?
Amazon essentially operates the ‘market-place’ model of e-commerce – a special dispensation carved out by Modi – government under which 100% FDI is permitted [the guidelines in this regard – issued in early 2016 – are encapsulated in Press Note 3].
The ‘market-place’ is a platform where sellers and buyers meet to conduct sale and purchase transactions even as its owner [say, Amazon] merely acts as a facilitator. The market-place owner provides services such as book orders, raise invoice, arrange delivery, accept payments, handle rejections, warehousing etc – all under one roof. But, he can’t own and control inventory. He can’t undertake ‘direct selling’
Considering that the ‘market-place’ operator is not into direct selling [this can only be done by vendors using this platform] and merely provides services – in lieu of fee they charge from the sellers, it is unlikely that he would incur loss. Furthermore, a scenario in which the loss is so huge as to even exceed firm’s revenue is simply ruled out. Yet, this is precisely what Amazon has reported. The money Jeff Bezos promised to bring was to plug this loss, instead of adding to the productive capacity of Indian economy which indeed is an overarching rationale behind attracting FDI. In this backdrop, reprimand by commerce minister was not unexpected.
But, the big picture behind this needs to be comprehensively captured. The losses incurred by Amazon [as well as Flipkart – the other major player operating the e-commerce market-place] are the inevitable outcome of huge discounts on the products sold on the platform as also the money spent on promoting exclusive brands. The discount is normally given by the seller; the same applies to promoting a product. Why should the owner of market-place or service provider [read: Amazon] be footing the bill on these counts?
To unravel the mystery, let us look at the 2016 guidelines. The permission for 100% FDI in market-place is subject to two main riders viz. ‘the entity cannot 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.’ The devil lies in these very conditions.
This condition does not specify ‘who the vendor is’. Due to lack of such specification, a firm connected with marketplace [either its subsidiary or its joint venture (JV) with an Indian company] is eligible. In other words, each such entity could control up to 25% of sales or four of them could control all sales on the platform. So, you have companies like Cloudtail [an Amazon venture in partnership with a firm owned by Narayan Murthi] operating as lead sellers on the platform.
Thus, contrary to the real intent of the policy which disallowed marketplace owner from direct selling to individual consumers, the fine print permitted them – albeit by its subsidiary or JV. This is precisely what the e-commerce majors were doing. They were operating as direct sellers, controlling inventory, giving discounts, spending on ads and promoting exclusive brands.
While, this resolves the mystery regarding the role played by Amazon/Flipkart et al on Indian turf, a fundamental question remains as to why they are burning cash. The answer lies in their attempt to capture a sizeable chunk of the market even if it means a couple of billion dollars going down the drain. No wonder, small traders and businesses whom the e-commerce platform was intended to help have in fact suffered heavily. This is because the business that should have gone to the former was in fact, appropriated by the latter [read: the dominant seller owned and controlled by itself].
All India Online Vendors Association [AIOVA] – an umbrella organization of small traders even petitioned the Competition Commission of India [CCI] alleging abuse of market dominance against Flipkart India Pvt Ltd, which is into wholesale trading/distribution of books, mobiles, computers and related accessories and e-commerce marketplace Flipkart Internet Pvt Ltd. It is ironical that CCI saw nothing wrong in this practice.
The CCI ruled that looking at the present market construct and structure of online marketplace platforms in India, “it does not appear that any one player in the market is commanding any dominant position at this stage of evolution of market”. This was bizarre. That a few players – that too connected to the owner of market-place are dominating the platform is visible even to the naked eye; yet the regulator thinks otherwise. The National Company Law Appellate Tribunal [NCLAT] has quashed the CCI order and directed it to initiate the probe.
In another complaint filed on January 13, 2020 by traders’ body Delhi Vyapar Mahasangh [DVM] alleging anti-competitive behavior by Amazon Seller Services and Flipkart Internet, the CCI had ordered a probe [differing orders by the regulator on the same ‘core issue’ in different cases is incomprehensible]. In this case however, the regulator was on the right track. But, the investigation has been stayed by High Court of Karnataka for a period of eight weeks.
Meanwhile, in a public interest litigation [PIL] filed by the Retailers Association of India [RAI] in early 2018 alleging violation of norms for FDI in e-commerce, the Enforcement Directorate [ED] had even informed Delhi High Court [DHC] on October 31, 2018, that it was investigating violation of the Foreign Exchange Management Act [FEMA] against Amazon et al. But, the proceedings are stuck due to lackluster attitude of agencies and the court.
The judicial proceedings may take long to conclude. But, prima facie e-commerce majors can’t get away from the fact that they have violated the spirit behind the policy on FDI in market-place; further they are also acting as dominant sellers on the platform and disingenuous bureaucrats have allowed them to do so by crafting policy details to suit them. The clarification to Press Note 3 issued on December 26, 2018 has not materially altered the position on ground zero.
The clarification says ‘the owner of market-place or its subsidiary or its joint venture with Indian company can’t have ownership of the seller’. Further, ‘a seller/firm on the platform can’t source more than 25% of its inventory from a firm connected with the latter’. The market-place owner can get around (i) by having < 50% shareholding in the seller firm and (ii) arranging for its wholesale arm to continue supplies to the seller but keep it within the 25% threshold.
The current state of affairs is doing no good to any stakeholder. In fact, the very idea of attracting FDI in Indian retail vide market-place is flawed. If, the government wants a foreign investor to come, the he should be able to get a reasonably good return. In this case, the former is keen that the latter should make heavy investment in all that is needed for carrying out sales ‘smoothly’ and ‘seamlessly’ [viz. procurement, handling, warehousing, delivery etc] but not allow him to sell. With no permission for ‘direct selling’, no foreign entity would invest?
Yet, if Amazon, Flipkart [now owned by Walmart] and others came, that is because they were allowed to sell albeit through the backdoor. But, when there was backlash from small traders [our policy makers including Goyal wanted them to ride piggy back on the platform set up by Amazon et al], the minister, regulator and judicial bodies are forced to talk of action against these foreign companies.
The government is caught between the devil and the deep blue sea. If, it doesn’t take any decisive action against Amazon et al, the wrath of small traders will snowball and could cost it politically in the upcoming state elections. On the other hand, if it acts then, it will be tantamount to ‘retrospective’ change of policy and affect its image as a good investment destination. But, allowing things to linger on will only worsen the situation. It should take a clear-cut stance.
The government should shun the marketplace model. It should allow 100% FDI in retail be it online or offline [at present, 51% FDI is allowed in offline retail but that is subject to too many riders; that is as bad as ‘barring FDI’]. This will fully legitimize the operations of Amazon et al who are already in direct selling and preserve India’s global image. At the same time, permitting 100% FDI in offline will create level playing field for brick-and-mortar retail outlets. It is in the best interest of small traders as it will lead to all round development of the infrastructure and wide range of choice for sourcing products. It will be pro-consumer in the long-run with many players catering to their needs at competitive/affordable price.