The Centre’s curiously timed attempt to ‘clarify’ foreign direct investment norms for e-commerce players could end up scuttling investor interest in the sector that has attracted large foreign players and generated thousands of jobs. The fresh restrictions and the clarifications on certain operational aspects could reinforce investor complaints about India being unpredictable in terms of policies. In March 2016, foreign investment up to 100% was allowed under the automatic route for e-com firms engaged in business-to-business transactions using the marketplace model — one where a firm sets up an enabling IT platform to facilitate trade between sellers and buyers. However, FDI was not allowed where the e-com player owned the inventory of goods to be sold, or for business-to-consumer purposes, barring a few exceptions. Now, the rules have been altered for players like Amazon or Flipkart (majority-owned by Walmart) that have made significant investments in India. The policy, to kick in from February 1, 2019, could require a major overhaul in the business model and shareholding structures of such players. For instance, earlier a single vendor or its group firms couldn’t account for over 25% of sales in a marketplace; now the rules bar sales by any entities where the e-com firm has an equity stake. A vendor’s inventory will be deemed to be controlled by the e-com player if more than 25% of its purchases are from the latter or related firms. It’s not clear how this change will help meet the principle enunciated in the policy note — fairness and the creation of a non-discriminatory, level playing field.
Separately, any specialised back-end support for some sellers must now be extended to all vendors, while discounts, cash-backs and preferential subscription services have been made far trickier to implement. An e-commerce marketplace entity will not mandate any seller to offer a product exclusively on its platform under the new rules. But this doesn’t explain what to do when a seller voluntarily opts to sell exclusively on one e-commerce portal over another. The government is clearly keen to quell the long-brewing disquiet among offline retailers over big discount sales and the surge in e-commerce. Yet, it could have waited for the recommendations of a national e-commerce policy task force set up this April. That task force could trigger more policy shifts. India’s retail FDI policy remains muddled — with the debate now focussing on online vs offline trade as opposed to big vs small, or a single brand vs multi-brand retail FDI regime. Globally, India has been taking on protectionism, and this month the Finance Minister said free trade is essential so consumers get the best deal everywhere. The same consumer focus and non-protectionist tenets must be applied for internal trade.
