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Indian Govt Starts Discussion On FDI In E-Commerce; Our Take

It looks like there is finally some progress on the Indian government’s stance towards foreign direct investment (FDI) in the e-commerce segment, with the Department of Industrial Policy and Promotion (DIPP) releasing (pdf) a discussion paper on e-commerce in India.

The department has invited comments, views or suggestions from interested parties until January 30, 2014. You can download the discussion paper here.

Industry Bodies & MNCs Favor FDI In E-Commerce But Traders Body Oppose It

DIPP mentions that it has received number of representations from various stakeholders in recent months. Several MNCs, industry bodies and an international council have made a case for allowing FDI in B2C e-commerce which is currently prohibited as per the policy guidelines. Earlier, reports had suggested that NASSCOM was in favor of FDI in e-commerce as long as the government makes local sourcing mandatory to a certain amount. Assocham had also requested the government to withdraw the ban and had apparently sought support from the Telecom and IT minister Kapil Sibal.

One of the MNCs has also suggested a separate policy framework for FDI in e-commerce which relies on functionality-based treatment of e-commerce platforms to bring much-needed parity between e-commerce and the recently liberalized brick & mortar retail trade policies.

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On the other hand, DIPP notes that a national body of traders has strongly opposed this move, saying that the Indian market is not yet ready to open up e-retail space for foreign investors. It says allowing FDI in this sector will have a disastrous impact on the industry leading to monopolies in e-commerce, manufacturing, logistics, and retail sector, causing large scale unemployment.

It also claims that e-commerce players will have more bargaining powers than standalone traders due to the scale of operations and will provide e-commerce players with complete geographical reach which is against the spirit of FDI in multi brand retail (i.e. being restricted to cities with 1 million population in consenting states).

Remember that a few Bangalore-based brick and mortar retailers had earlier written to the Competition Commission of India, alleging that e-commerce companies were engaging in predatory pricing in India, although we are not quite sure of how warranted these claims were. In our opinion, online retailers are only increasing the competition, by allowing consumers to choose from various price points, since there is no concept of minimum retail price as of now. More on that here.

Medianama Take

We’re of the view that India should allow 100% FDI in e-commerce sector. Companies who want to set up businesses in the country and are ready to fulfill the set conditions, should be allowed to do so. You can’t just kill an entire industry just because of some non-serious players, especially since e-commerce provides significantly better variety of products for the consumers and better reach for merchants. The current policy has forced many businesses to change business models from an inventory-based model to a marketplace model (since marketplaces are allowed under the current FDI norms) or shut shop since the investments in the sector has relatively gone down. (Read: Our white paper explaining the Structuring of Foreign Direct Investments In eCommerce in India).

This has also been suggested by a couple of domestic e-commerce companies to the department. One of the companies has suggested allowing 100% FDI under automatic route in the sector, subject to certain conditions like no offline retail trading by the company, 40% sourcing from SME/MSME and other local business and no sale of food/agriculture produce/ processed food on B2C e-commerce platforms. Another company has suggested that India should initially allow FDI in financial form and not in strategic form, however a 100% strategic investment can be considered over a period of 3 – 4 years in a phased manner, by when these companies could build scale and compete with large corporations.

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Questions Raised In The Discussion Paper

Some of the questions raised by DIPP in the discussion paper besides asking whether FDI should be allowed or not, include:

– Should FDI be opened for all products or only for non-food products?
– Whether there should be a limit on minimum capitalization?
– Should there be a limit on the percentage of sourcing from domestic manufacturers and what should be the limit?
– What should be the entry routes and FDI caps in B2C e-commerce companies. Should FDI be allowed under an automatic route up to 50%?
– How will retail sale under MBRT be restricted to States that have agreed to open frontend stores?
– What are the likely benefits to Indian economy, particularly in terms of FDI inflows, additional employment, back-end infrastructure and efficiency?
– What should B2C e-commerce cover – Goods, Services and/or Intellectual Property?

Our Coverage of FDI In E-Commerce

April 2012: India Allows 100% FDI In B2B E-Commerce; Restricts Investments In B2C
September 2012: FDI In Multi-Brand Retail: What E-Commerce Players Are Saying
September 2012: Why Not Allow FDI In E-Commerce?
December 2012: Enforcement Directorate To Probe Flipkart For Alleged FDI Norms Violation
March 2013: A Rant On India And E-Commerce
August 2013: The Ambiguity In Government’s Stance About FDI In E-Commerce Policy
November 2013: FDI May Soon Be Allowed In Certain E-Retail Ventures: Report

Further Reading

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– We’re The Only Company In The Space That Has FDI Approval – Homeshop18 CEO Sundeep Malhotra
– Sanjeev Bikhchandani: Not Enough Indian Capital To Support E-Commerce In India
– The Funding Environment For E-Commerce In India – K Vaitheeswaran, IndiaPlaza
#Outlook14: What Indian E-Commerce Companies Plan To Do

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