The Government’s unrealistic policy of barring foreign direct investment in the business-to-consumer segment has pushed e-commerce retailers to camouflage themselves as market places to access funds from abroad
The Delhi High Court is hearing a plea filed by the All-India Footwear Manufacturers and Retailers Association, regarding the alleged flouting of foreign direct investment rules by e-commerce companies. In its affidavit to the court, the Department of Industrial Policy and Promotion has argued that its job is to formulate policy — not monitor implementation.
The DIPP added that it has already laid down a ‘transparent’ and ‘predictable’ policy which permits 100 per cent FDI in business-to-business transactions in e-commerce, but only prohibits in the business-to-customer segment. Further, it does not recognise the concept of a ‘market place’, which all major e-commerce companies viz, Flipkart, Snapdeal and Amazon are projecting as their business model.
DIPP is the nodal authority for all FDI-related issues. If, it was so confident that the much touted ‘market place’ concept has no validity, then why did it not communicate in clear terms to the Finance Ministry about the violations under the Foreign Exchange Management Act? Why did it wait till the matter came up in court?
On the other hand, if, the DIPP felt that the rules were clear (requiring no clarification), then why did the Finance Ministry not take cognisance of the violations and ask the Enforcement Directorate to initiate action against e-commerce companies? This is all the more reprehensible when the Union Finance Minister basks in the glory of a surge in FDI, propelled in large measure by inflows into e-commerce — and yet there is no clarity if such inflow is permitted under current regulations.
Now, the court has seen a prima facie violation of FDI policy by e-commerce companies and asked the ED to probe 21 e-commerce players in India. If the investigation is meant to authenticate what is already known, does this not tantamount to a sheer waste of time? Last year, the court had told the Government to sort out the matter within four months, but the latter continued to dilly dally.
To understand what an e-commerce company does, look at this: The customer registers his/her request for an article on the web portal. The portal then raises an invoice and arranges for its delivery (from its warehouse) to the customer’s address. The company also receives considerations, accepts rejections and arranges for refund. In short, it performs all sales-related functions and has all the logistics to support these.
Operations of e-commerce companies fall under B2C classification. If, however, e-commerce companies were to accept reality and declare themselves retailers, they will find themselves on the wrong side of the law. So, e-commerce companies ‘camouflage’ their retailer status under the so-called ‘market place’ model — a euphemism for a platform where sellers and buyers conduct transactions.
What pushed e-commerce companies to take up such an unhealthy practice? It is the Government’s unrealistic policy of barring FDI in the B2C segment. The policy goes against the contemporary milieu wherein FDI is badly needed to boost economic activity including in the retail segment. Foreign funds are waiting to come in. If you choke the flow, these will still come in, albeit in a round-about manner.
Under the extant policy approved by the UPA dispensation in 2012 and continued by the Modi Government, 51 per cent FDI is allowed in multi-brand retail. But, several riders, such as 30 per cent sourcing from small enterprises, a minimum investment of $100 million, prior approval by States Governments etc, have virtually shut the door to FDI in MBR. In this backdrop, permitting FDI in e-commerce would have been out of sync. So, that too has been banned.
With FDI in both forms of MBR banned, foreign funds are pouring into e-commerce illegally. This too will stop under orders from the court sooner than later. Even the money already invested will have to go back. The consequences will be too dastardly to fathom.
The Government allows 100 per cent FDI in single-brand retail. Recently, rules were tweaked to permit a foreign company already in single-brand retail to sell the brand via e-commerce as well (for example, Ikea will be able to sell its furniture on e-platforms). Hundred per cent FDI is also allowed in wholesale cash-and-carry businesses. How ironical that foreign companies in India can sell, through multi-brand platforms, to wholesale buyers but not to retailers.
Much of the current policy mess is due to the unnecessary classifications such as ‘single-brand’ and ‘multi-brand’, a practice unique to India. The rest of the world does not differentiate in retail. Why cannot India follow this practice? Why can’t the Government allow 100 per cent FDI in MBR?
Once the anomaly with regard to foreign investment in the physical segment is removed, the Government will have no problem allowing 100 per cent FDI in e-commerce retail including the B2C segment. With this, both retailers and e-tailors will be at a level-playing field and can engage with foreign investors in an open and transparent manner (no back door entry).
http://www.dailypioneer.com/columnists/oped/policy-muddle-in-fdi-retail.html