Based on complaints submitted by the Confederation of All India Traders (CAIT) to the Union Commerce Minister Piyush Goyal in the recent past for blatant violation of FDI (foreign direct investment) Policy and Foreign Exchange Management Act (FEMA), 1999 by Amazon and Walmart-owned-Flipkart, the Department for Promotion of Industries and Internal Trade (DPIIT) of the Ministry of Commerce has written letters in December, 2020 to the Reserve Bank of India (RBI) and the Enforcement Directorate (ED) asking them to take necessary action against these global e-commerce giants.
This communication from the DPIIT may not enthuse when viewed in the backdrop of numerous such representations made in the past by CAIT as also other associations of small traders and businesses such as the Retailers Association of India (RAI), All India Online Vendors Association (AIOVA), Delhi Vyapar Mahasangh (DVM) and so on but without any result. They have even taken the matter to the court and have failed to get any relief so far.
Before, we look at the complaint, let us take a look at the extant FDI policy under which Amazon and Flipkart have come to India.
For the purpose of FDI, unlike the international practice where retail is treated as a single homogenous sector without any distinction, the Indian Government has divided retail into several classes. In India, we have Single-Brand Retail (SBR) and Multi-Brand Retail (MBR) or retail as it is known in common parlance. Within retail, there is the “physical” format which takes two forms: (i) the euphoric mom-and-pop stores and organized retail; (ii) the online format, which has two sub-categories namely (a) the marketplace and (b) inventory-based model.
In the physical format, as per a policy approved by the then UPA dispensation in 2012, as much as 51% FDI is allowed but with riders such as 30% local sourcing, minimum investment of US$100 million and prior approval of the State where the retail shop is to be set up. In 2016-17, 100% FDI in food retail was allowed, subject to the foreign retailer selling items which are sourced only from Indian farmers and processed locally. Besides, 25% of investment should be in agri-infrastructure like irrigation, farm machinery etc.
In the online format, as per guidelines issued in early 2016, (Press Note 3) 100% FDI is allowed under the marketplace model. The marketplace is a platform where vendors sell their products to consumers even as its owner merely acts as a facilitator. The marketplace owner provides services such as booking orders, raising invoices, arranging delivery, accepting payments, handling rejections, warehousing and so on. But, s/he can’t hold inventory and undertake direct selling.
The permission for 100% FDI in the marketplace is subject to two main riders, that is “the entity cannot permit more than 25% of total sales on its platform from one vendor or its group companies. Further, it can’t directly or indirectly influence the sale price.” Sans any mention as to “who the vendor is”, a firm linked to the marketplace (either its subsidiary or a JV with an Indian company) is eligible.
Thus, contrary to the real intent of the policy, which disallowed the marketplace owner from direct selling to individual consumers, the fine print permitted them to do so — albeit by its subsidiary or JV. This is precisely what e-commerce majors such as Amazon and Flipkart/Walmart have been doing even though they came in as marketplace operators. They are operating as direct sellers, controlling inventory, giving discounts and so on.
A clarification to Press Note 3 issued on December 26, 2018 has not materially altered the position. It says “the owner of the marketplace or its subsidiary or its JV 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 marketplace owner can get around both. First, by having less than 50% shareholding in the seller firm and argue, he has no control (albeit majority) over the latter and second through the wholesale arm continuing supplies to the seller but within the 25% threshold.
This has not deterred the hold of e-commerce giants over Indian retail; they are dominant sellers themselves, giving little space to millions of small vendors for whose benefit this unique policy dispensation of marketplace was designed.
Meanwhile, Reliance Industries Limited (RIL) which last year received a whopping foreign investment of Rs 1,50,000 crore (Rs 43,450 crore from US internet giant, Facebook alone) in its 100% subsidiary Jio Platforms Limited (JPL) for total shareholding of 30% has also joined the bandwagon.
Apart from other businesses such as wireless broadband, enterprise broadband, internet-of-things etc, JPL has within its fold e-commerce which is powered by JioMart commerce. The platform offers technology-enabled wherewithal to enable 30 million stores deliver products to consumers in the neighborhood (the plan is to target a mammoth 400 million of them using the database of WhatsApp – a 100% subsidiary of Facebook) at their doorsteps. The business model is a hybrid of online and offline retail which will also integrate with itself thousands of retail stores spread all over India operated by Reliance Retail Limited (RRL).
Like Amazon et al, Reliance/Facebook too will be operating as direct sellers, controlling inventory, giving discounts etc which is not in sync with the policy on FDI in e-commerce marketplace that prohibits inventory model and direct selling. Yet, they can get around by citing that foreign shareholding in the seller firm is less than 50% or a wholesaler linked to JioMart owner Reliance/Facebook will keep its supplies to the vendor within the 25% threshold.
The continued opaqueness in the policy – even after the clarification vide Press Note 3 – has ensured that the foreign majors don’t violate the rulebook even as their operations on go against the very spirit of the policy. No wonder then, numerous representations by the small vendors, through their associations such as AIOVA, RAI, DVM and so on (ever since the days of then Commerce Minister, Suresh Prabhu and now Piyush Goyal) as also petitions before the judicial authorities at various levels have not yielded any results. The sole reason is that the courts go by the fine print which suits these giants.
In view of above, it is unlikely that the latest action of the Commerce Ministry asking the RBI and the ED to take necessary action against these global e-commerce giants will lead to any positive outcome. What then is the way forward?
One option could be to further tweak the extant norm to eliminate the possibility of any circumvention. Thus, Press Note 3 can be modified to say that “the owner of the marketplace or its subsidiary or its JV with Indian company can’t have even 1% shareholding of the seller on the platform.” Further, “a seller/firm on the platform can’t source any supplies from a firm connected with the latter.”
The above two stipulations will ensure that the owner of the marketplace platform has no connection whatsoever with the seller on its platform – neither by way of holding any shares in latter’s firm nor making any supplies to it. This indeed is the only way to align the rules with the spirit of the policy which is to ensure that the foreign company only performs the role of bringing the sellers and buyers on a common platform to conduct transactions and nothing beyond.
But, that would be an extreme step. Apart from being almost impossible to implement (this involves microscopic watch on shareholding patterns including cross holding through a maze of subsidiaries and JVs as also the stock flow of each and every seller on the platform), this will tantamount to asking the foreign majors to pack up. This will be viewed as retrospective change of policy and give a wrong signal about India not being an attractive destination.
The Government should shun this option. Instead, it should legitimize inventory holding and direct selling by foreign companies in Indian retail – both online and offline without any riders (special categories such as 100% FDI in food retail should go). This will level the playing field for all, online vs offline, food retail vs non-food and so on and eliminate discretion of bureaucrats whose writ is all-pervasive when it comes to grant of approvals.
It will help small traders by leading to all-round development of infrastructure and offering a wide range of choice for sourcing products. They can and will co-exist with big players — both foreign and Indian. It will be pro-consumer in the long-run with many players catering to their needs at competitive/affordable price. Sans these policy changes, under business as usual scenario, the consumers will pay a heavy price in the medium to long-term as Indian retail will be cartelized by a few players viz. Amazon, Walmart and Facebook/RIL.