In a meeting with stakeholders in the e-commerce segment – including multinational companies [MNCs] such as Amazon, Flipkart etc – the minister for commerce and industry, Piyush Goyal categorically ruled out any change in the extant policy on foreign direct investment [FDI] in ‘market-place’ model of e-commerce.
This has led to huge disappointment among foreign majors who were hurt by the amendments/clarifications to the 2016-17 policy [Press Note (PN) 3] made vide circular dated December 26, 2018 and were looking for necessary correction to remove the anomalies – as they perceived. The U. S. – India Business Council [USIBC] – a US-based lobby group – even termed the amendments as ‘retrospective’ which created uncertainty of the policy environment.
What was the 2016-17 policy? How did the MNCs perceive it? How did it impact FDI inflow? How did the Dec 26, 2018 vitiate the atmosphere? What is the way forward?
As per PN-3 was issued by the then department of industrial policy and promotion [DIPP] – now rechristened as the department for promotion of industry and internal trade [DPIIT] – the government allowed 100% FDI in the so called ‘market-place’ model of e-commerce.
The market-place is an electronic platform on which the sellers/vendors get connected with the end consumers and carry out the sale/purchase transactions. The owner of the platform is expected to act only as a facilitator by providing support services viz. warehousing, logistics, order fulfillment, payment collection, handling rejection etc to the vendors but not undertake direct selling.
At the core of the policy was prohibition on direct selling by the foreign entity who owns the marketplace. It meant that neither itself nor any of its subsidiary nor its joint venture [JV] with Indian resident would have a stake in the vendor selling on its platform. Accordingly, the bureaucrats were expected to write the rules. But, this spirit was not reflected in the Press Note.
Thus, the Note said ‘owner of the market-place can’t permit more than 25% of total sales on its platform from one vendor or its group companies’. Another condition stated ‘it can’t directly or indirectly influence the sale price’.
The insertion ‘or its group companies’ in the first condition legitimized the role of the market-place owner as a vendor [albeit vide its group company]. Further, the cap of 25% on sales by one vendor implies that 4 subsidiaries/JVs of the foreign major could control all of sales on the market place. In short, the notification allowed MNCs in to direct selling in complete violation of the policy intent.
The e-commerce majors exploited the policy loopholes in the PN-3 to the hilt. For instance, SuperComNet, RetailNet, OmniTechRetail – entities in which Flipkart holds substantial stake – were made preferred sellers on latter’s market-place. These sellers picked up products from the wholesale arm of Flipkart in India and then, sell on latter’s market-place [ditto for Amazon].
The above arrangement was as good as allowing Flipkart to sell directly to the end consumers. No wonder, this prompted the US-based retail major Walmart to acquire over 3/4th stake in Flipkart by paying a mammoth US$ 16 billion last year.
This led to strong resentment among millions of small traders/retailers who petitioned the government as also the court. Their main contention was that the foreign majors were violating the FDI guidelines. Even the Enforcement Directorate [ED] was asked to investigate the money laundering angle.
To address their concerns, the DPIIT issued a circular dated December 26, 2018 which said that ‘the market-place entity can’t have ownership in the vendor’. Further, the vendor will not be allowed to sell its products on the marketplace entity’s platform if the latter [or its group companies] are deemed to be in control of its inventory. The test for this is that the vendor should not buy more than 25% of its inventory from the marketplace owner [or its group entity].
The foreign majors are unhappy with the above amendment or clarification. But, on a close look, it turns out that they have not lost much ground. The first rider may be open to varying interpretation. One view could be that the market place can’t hold even 1% equity in the vendor. The other could be that the former can’t hold majority stake in the latter. This can enable the foreign major have some holding [albeit <50%] and exercise control over the vendor.
However, the second rider gives the marketplace owner more leverage. For instance, he could have an arrangement with several vendors each capping purchase from him [read: marketplace] at 24.99% of his inventory [those vendors could even be ‘proxies’]. This will ensure that even now, the foreign major can remain in direct selling without appearing to be in violation of the rules.
Already, in the follow-up to the December 26, 2018 circular, the foreign majors are looking for the so called ‘alpha sellers’ and ‘beta vendors’ who will replace the hitherto preferred sellers even as their business model will remains fundamentally intact.
The operations of marketplace entities require intensive policing to ensure compliance with the spirit of the policy. This job can be best done by a regulator. But, this is ruled out by the officials who opine that an inter-ministerial committee will handle complaints in this regard. This shows their real intent to let status quo continue.
Today, we have an anomalous situation whereby neither the MNCs are completely barred from direct selling [albeit offline] in Indian retail nor they have an unbridled entry. This ‘neither here, nor there’ syndrome creates uncertainty of the policy environment even as it keeps all stakeholders dissatisfied. The only beneficiaries are officials who wield enormous discretionary powers.
The government should put an end to this chaotic scenario. The way forward is do away with the marketplace; instead allow 100% FDI in retail in ‘online’ as well as ‘offline’ to ensure a level playing field. Further, there should be no riders to create a conducive environment for realizing its full potential.