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Indian govt disallows FDI in E-Commerce, limits discounting

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In what is largely a status-quo ruling from the Indian government’s Department of Industrial Policy and Promotion, FDI in B2C e-commerce has been disallowed in India, while FDI in marketplaces has been allowed to continue. A copy of the clarification and guidelines from the Indian government here. In that sense, this PTI story, which gives the impression that the government has allowed FDI in ecommerce marketplaces is inaccurate, since 100% FDI in marketplaces has always been allowed in India: how else did eBay buy Baazee.com? Marketplaces connect buyers with sellers, and several marketplaces, starting from Rediff (via NASDAQ), to Snapdeal, Paytm and Shopclues, and even the now defunct IndiaPlaza, have raised money from investors in the past. Lest we forget, Flipkart apparently switched to the marketplace model for compliance reasons in 2013, and Amazon India, as an ecommerce marketplace company owned by Amazon Inc, launched in the country in the same year.

So, to be honest, I’m not quite sure what this tweet below is about, because this government recognition isn’t new:

This ruling appears to be the outcome of a consultation process begun by the DIPP in January 2014.

Disallowing FDI in ecommerce

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What this development IS, is essentially a means to disallow FDI in actual ecommerce, which allows online retailers to own inventory and hence the consumer experience from start to finish. It also prevents smaller online retailers from raising FDI, and leaves them beholden to marketplaces for scale. Indian ecommerce majors, which are essentially marketplaces, would have wanted this because this shuts Amazon and its primarily inventory-led model out of India. The company has, however, managed to own parts of the process, by providing ‘Fulfilled by Amazon’ services for certain retailers, where it stores inventory in its warehouses for the sellers, and delivers goods to the buyers, again, on behalf of the consumers. It’s largely only different on paper, but this is clearly allowed, as per the circular: “E-commerce marketplaces may provide support services to sellers in respect of warehousing, logistics, fulfillment, order fulfillment, call center, payment collection, and other services.”

One interesting change: Discounting and cashbacks

There appears to be one interesting change, around discounting (a favorite topic for venture capitalist Mahesh “you can only discount your way to bankruptcy” Murthy, by the way). The guidelines state:

“Ecommerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field”

Now what does this mean? It does clearly mean that direct discounts on selling price will not be allowed – and so this probably puts an end to discounts disguised by ecommerce companies as marketing expenses. More importantly, does this also mean that cashbacks will not be allowed? This is where it becomes open to interpretation. Cashbacks are often given by the bank, and, probably, funded by Ecommerce marketplaces themselves. Paytm in particular uses cashbacks to to drive up wallet sign-ups for its wallet business.

So, will the DIPP view cashbacks as indirect discounts? If you look at it from a consumer perspective, it should: cashbacks are an indirect means of influencing the sale price of goods and services.

Also read: How Flipkart, Amazon and Snapdeal fund discounts

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MediaNama’s stand on FDI in Ecommerce

We’ve supported FDI in Ecommerce, because the ecommerce space isn’t a licensed oligopoly, and the government shouldn’t be allowed to keep out competition from those B2C retailers who would drive prices down, and lead to an increase in competition among the large scale retailers, and also allowe niche players to build stronger distribution and product sourcing systems: where else would you, for example, get multi-colored socks, but online? That said, it is no ones argument that there is insufficient competition in ecommerce. If nothing else, the last year saw hyper competition in the space, and focus largely on pricing. Our submission to the government (executive summary):

1. Should FDI be allowed in B2C e-commerce?
Ans: FDI should be allowed in e-commerce. Support needs to be provided for building an e-commerce market that will benefit consumers, create employment, encourage competition, and allow value creation and entrepreneurship to be support.

2. Should FDI be opened for all products or only for non-food products?
Ans: FDI should be allowed in all products, including food products.

3. Whether there should be a limit on minimum capitalization?
Ans: There should be no limit on minimum capitalization.

4. Should there be a limit on the percentage of sourcing from domestic manufacturers and what should be the limit?
Ans: For domestic sourcing requirements: a distinction should be made between digital and physical goods. No domestic sourcing requirements for digital goods. In case of physical goods, domestic sourcing of only 15-20% should be mandated, and that too, only beyond an annual Gross Merchandise Value sale of Rs 500 crore. This is allow starting up without restrictions, and help support domestic manufacturing once a business reaches scale.

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5. 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%?
Ans: No FIPB requirements for e-commerce. However, if FIPB oversight is mandated, then it should be via the automatic route until 75%, else it will add additional costs to a startup raising money. Even then, the FIPB process should be transparent and public.

6. How will retail sale under MBRT be restricted to States that have agreed to open frontend stores?
Ans: e-commerce should be treated separately from physical retail when it comes to retail sale under MBRT, in order to allow e-commerce businesses to target a single national market. Restrictions should only apply in case an e-commerce company sets up a physical retail business. No restriction on sale of digital goods under MBRT, since it may not be possible to ascertain country, state or city of consumer purchasing digital goods.

7. What are the likely benefits to Indian economy, particularly in terms of FDI inflows, additional employment, back-end infrastructure and efficiency?
Ans: Benefit of FDI in e-commerce: providing better goods and services to the consumer because of lack of geographical limitations and unlimited shelf space, and encouragement of competition. Businesses benefit because of wider reach and consumer base, and an entire ecosystem of e-commerce affiliated businesses gets created. This leads to more employment opportunities and competition for talent, leading to better pay. Policies that support Entrepreneurs will prevent a brain drain.

8. What should B2C e-commerce cover – Goods, Services and/or Intellectual Property?
Ans: DIPP should not treat Goods, Services and/or intellectual property as the same in case they intend to put restrictions, because this will impact SAAS businesses. They should then treat goods as physical and digital, and have no restrictions on/conditions for the sale of digital goods. Ideally, there should be no restrictions.

Full text of our submission (download pdf)

 

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Written By

Founder @ MediaNama. TED Fellow. Asia21 Fellow @ Asia Society. Co-founder SaveTheInternet.in and Internet Freedom Foundation. Advisory board @ CyberBRICS

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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