Caught in a cleft stick

Though Govt policy disallowed e-commerce platform owners from direct selling, the fine print permitted them to do so through a subsidiary or JV. And they have been doing so

Any announcement of foreign direct investment (FDI) is normally welcome in view of its contribution to capital formation, accelerating economic growth and adding to the foreign exchange kitty. Deviating from this normal practice, last month, the Union Minister for Commerce and Industry, Piyush Goyal was dismissive about the decision of the Amazon boss to bring a few billion dollars into India. He felt that Jeff Bezos was bringing money to make up for the huge loss the company was incurring in its operations in the country. 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 the Narendra Modi Government under which 100 per cent FDI is permitted. The “market-place” is a platform where vendors sell their products to consumers even as its owner (say, Amazon) merely acts as a facilitator.

The market-place owner books orders, raises invoices, arranges deliveries, accepts payments, handles rejections, warehousing and so on but can’t undertake “direct selling.” Considering that the operator only provides services in lieu of a fee, there is absolutely no question of any loss (unless the infrastructure created by him remains idle which is clearly not the case). Yet, Amazon has been incurring huge loss. The money Bezos promised to bring is to plug this loss, instead of adding to the stock of capital, which is the raison d’être behind FDI. In this backdrop, the reprimand by Goyal was not unexpected.

The losses incurred by Amazon and others like Flipkart are due to huge discounts on the products sold on the platform as also expenses on promoting exclusive brands. But discount is normally given by the seller; this is also true of promotion. The service provider can’t do it unless he is also masquerading as the seller. To unravel the mystery, let us look at the 2016 guidelines. The permission for 100 per cent FDI in the “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.

Sans any specification as to “who the vendor is”, a firm connected with the “market-place” (either its subsidiary or a joint venture (JV) with an Indian company) is eligible. In other words, each such entity could control up to 25 per cent of sales on the platform. So, you have companies like Cloudtail – an Amazon venture in partnership with a firm owned by Narayan Murthy — operating as lead seller on the platform.

Thus, contrary to the real intent of the policy which disallowed the e-commerce platform owners from direct selling to individual consumers, the fine print permitted them to do so, albeit through a subsidiary or JV. This is precisely what the e-commerce majors have been doing They were operating as direct sellers, controlling inventory, giving discounts and so on. But, why should they be 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 (as reiterated by Goyal, time and again) have suffered heavily. This is because the business that should have gone to the former was, in fact, appropriated by the latter i.e. the dominant seller owned by itself.

The All-India Online Vendors Association — an umbrella organisation of small traders — petitioned the Competition Commission of India (CCI) alleging abuse of market dominance against Flipkart India Private Limited, which is into wholesale trading/distribution of books, mobiles, computers and related accessories and e-commerce marketplace Flipkart Internet Private Limited. 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 platforms in India, “It does not appear that any one player in the market is commanding any dominant position at this stage of the evolution of the market.” This was bizarre. That a few players connected to the owner of “market-place” are dominating the platform is visible even to the common man, yet the regulator thought otherwise.

The National Company Law Appellate Tribunal (NCLAT) has rightly quashed the CCI ruling and ordered a probe. In another complaint filed on January 13 by the traders’ body Delhi Vyapar Mahasangh (DVM) alleging anti-competitive behaviour by Amazon Seller Services and Flipkart Internet, the CCI had ordered a probe. But the investigation has been stayed by the High Court of Karnataka for two months.

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 the 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 the lackadaisical 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 the “market-place.” They are also acting as dominant sellers on the platform and disingenuous bureaucrats have allowed them to do so by suitably crafting policy details.

A clarification issued on December 26, 2018 has not materially altered the position on ground zero. It says, “The owner of market-place or its subsidiary or its JV with Indian company can’t have ownership of the seller. A seller/firm on the platform can’t source more than 25 per cent of its inventory from a firm connected with the latter.”

The “market-place” owner can get around both, first by having less than 50 per cent shareholding in the seller firm and arguing he has no control (albeit majority) over the latter and second with its wholesale arm continuing supplies to the seller but within the 25 per cent threshold. The current state of affairs is doing no good to any stakeholder, be it foreign investors, small traders or consumers. Even as small traders are losing heavily, Amazon et al have a Damocles’ sword hanging over them for all time and the consumer, though a beneficiary currently, will pay heavily in the medium to long-term, as Indian retail gets increasingly cartelised by a few players. The very idea of attracting FDI vide the “market-place” is flawed. The Government wants to have the cake and eat it too. It wants foreign majors to invest heavily in infrastructure for procurement, handling, warehousing, delivery and so on (only to help small traders) but not allow them to sell.

With no permission for “direct selling”, no foreign entity would invest. Yet, if Amazon et al came, that is because they were allowed to sell albeit through the “back-door.” But when there was backlash from small traders, the Commerce Minister was 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 State elections. On the other hand, if it acts then, it will tantamount to “retrospective” change of policy (with reference to what is written in the fine print) 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 “market-place” model and allow 100 per cent FDI in retail, both online and offline (at present, 51 per cent FDI is allowed in offline retail but that is subject to too many riders. That is as bad as barring FDI). This will fully legitimise the operations of Amazon et al, who are already in direct selling and preserve India’s global image. At the same time, permitting 100 per cent FDI in offline will create a level playing field for brick-and-mortar retail outlets.

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 foreign majors. It will be pro-consumer in the long-run with many players catering to their needs at competitive/affordable prices.

(The writer is a New Delhi-based policy analyst)