Amidst reports of millions of retailers facing heat from the e-commerce majors such as Amazon, Walmart/Flipkart etc, the announcement by Reliance Industries Limited [RIL], chairman, Mukesh Ambani – at the Vibrant Gujarat Summit on January 18, 2019 to make a foray into e-commerce business on a mega scale involving its 3 million merchants [besides its own 7,500 retail stores, 350 million customers and 215 million Jio subscribers] should bring cheer to them all.
In a first step towards launching its e-commerce portal, it will sell over a million PoS [point of sale] machines in Gujarat alone as it targets 1.2 million small retailers through e-commerce play. Available at a refundable security deposit of Rs 3,000/-, these machines would help them to get hooked to RIL’s larger retail ecosystem where they get to order inventory, accept digital payments, access to data base of regular customers and secure easy short-term loans.
Unlike Amazon, Walmart/Flipkart, who have sellers/vendors on their e-commerce platform, RIL would run an inventory-based model on its online marketplace. It will sell inventory to merchants/mom and pop stores/retailers all over the country through its B2B [acronym for wholesale] arm. The merchants in turn, can sell offline as well as on Reliance’s online marketplace.
The merchants/retailers will get a wholesome package – not just sourcing products and handling inventory and logistics management but also, enable them to accept digital payments [via Jio Money], providing fintech solutions including funding [via its payments bank] and tax solutions under GST [via Jio GST].
Such a collaborative effort – mooted by RIL – is a win-win for all stakeholders especially the merchants unlike the online marketplaces run by foreign majors which are dominated by a few vendors [whose ownership and control can be traced to the majors] leaving the former in the lurch. There is need for replicating this model so that tens of millions retailers/merchants can benefit.
The foreign majors are increasing their presence in Indian retail exponentially. It is therefore only fair that the retailers/merchants benefit from it. Does the extant policy help? In this regard, the Press Note 3 [2016-17] which allows 100% foreign direct investment [FDI] in ‘market-place’ model – a platform where vendors sell their products – mentions certain conditions.
As per PN-3, an entity owning the marketplace can’t own stocks and can’t sell directly to consumer [B2C]. It 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. An entity owning stocks and selling directly to consumers [‘inventory’ model] can’t accept FDI.
On the face of it, it would appear that a large number of vendors would get a chance to sell on the platform. But, on a closer look, it turns out that a few vendors control the platform. Further, it allows for the possibility of the platform owner [read: Amazon et al] having ownership of these vendors. Indeed, this is happening. So, in reality, the small traders/merchants stand little chance.
No wonder, the retailers associations have lodged their protests with the government and even challenged the actions of global majors in courts. The latter are also facing charges of money laundering and violating extant guidelines pertaining to FDI. These are being investigated by the Enforcement Directorate [ED] under the Foreign Exchange Management Act [FEMA].
On December 26, 2018, the government issued clarifications to the policy – as contained in PN-3. It clarifies that vendors in which the owner of the marketplace has ownership and control will not be allowed to sell on the platform. Any vendor who buys more than 25% of overall sales from the marketplace or its group company will be deemed to be controlled by the latter. Further, a marketplace can’t have ‘exclusive’ arrangement with a vendor.
Notwithstanding the clarification, there is no guarantee that owner of the marketplace won’t be controlling the inventory or sales from the platform. For instance, he can have 49% share in a joint venture [JV]/vendor with a local company who holds 51%. This way, the former can be in compliance with the rules [as majority equity rests with the latter] yet have control over the inventory.
Even a bigger question is enforcement. After all, the PN-3 has been in force for almost three years now. Despite the riders/conditions being already there in the note [December 26, 2018 notification only clarifies them], the agencies have not been able to enforce. There is no certainty that these stipulations will be enforced now.
Clearly, the extant dispensation is hazy leaving enough room for foreign majors to get into inventory model and direct selling to consumers. It is not conducive to giving millions of small traders an opportunity to leverage e-commerce for boosting their sales. It also disturbs the level playing field vis-à-vis brick-and-mortar players who are allowed 51% FDI subject to riders not so easy to comply.
The government needs to clear the policy mess. It should go for a uniform policy allowing 100% FDI in retail in both ‘online’ and ‘offline’ without any riders. This will create level playing field and make way for several players [operating on a scale similar to the plans mooted by RIL] to give a boost to retail. This will also open up opportunities for tens of millions of small traders.
Will the new government [post-2019 general elections] crack the whip on this major reform?