India E-Commerce gets an FDI Impetus

The Government of India signaled its intentions to bolster the country’s e-commerce market in December 2018. Clarifying its stance via the Department of Industrial Policy & Promotion (DIPP), the intent was clear: to ensure that e-commerce players/marketplaces do not influence the sale price of the goods sold on their portal.

Furthermore, as per the government, if an entity is controlling the inventory sold on its portal, not only is it violating the FDI policy on e-commerce but also the FDI policy on multi-brand retailing.

From February, to keep further tabs on inventory ownership, the government ruled that an e -commerce platform cannot purchase more than 25% of the total value of goods (of the vendor) from a single vendor/its group of companies. In other words, a vendor can only sell 25% of its total goods by value to a single e-commerce player.

Why introduce these clarifications now? Simply put, with the intention of protecting small and medium scale players and providing a level playing field. Also, the provision that an e-commerce player cannot have any equity stake in an entity that sells on its platform will come as a setback to the major e- commerce players, which have subsidiaries/group companies that they have invested in to improve the predictability of their supply chains. It could be difficult for the e-commerce players to rely on small/medium scale individual players for large scale deliveries. This in turn could be detrimental to their brand equity, promised delivery timelines and supply chain predictability.

Also, the provision that a vendor cannot sell more than 25% of its goods by value to a single marketplace will impact price points as buying in bulk from a single vendor allows for better pricing and uniformity in quality. Not only will it impact the pricing and quality for the marketplace, but also pose operational issues for vendors that only survive on selling their goods online. The 25% norm will imply that a vendor needs at least four marketplaces for offloading the entire inventory.

While there was ambiguity around the impact of the decision on the food retailing business, a press note on 3rd January by the government clarified that there was no change in the food retail trading policy which permits 100% FDI under approval route, including through e-commerce. Also, the press note clarified that there was no prohibition on sale of private labels on these marketplaces. However, since most of these private labels are owned by the e-commerce entities, hence, further clarity on the same would be needed on how these labels can continue being sold on these portals in the wake of the equity stake restriction.

Though the intent of these provisions is to ensure that there are no circumventions around the existing policy (specially to gain entries into multi-brand retail); however, some of these provisions could seemingly be restrictive. Also, instead of restricting the percentage of goods that can be bought from a single vendor, placing some norms for these vendors to engage in domestic sourcing might be more meaningful. Not only will it be beneficial for local vendors and the economy but will also allow the strategic relationship equation to thrive; which is the foundation on which retail trade around the world rests on. Also, there needs to be more thought around the point put forward on exclusive sale/launch by a brand on a platform. Some brands (even in offline retail) prefer an exclusive arrangement with a specific partner due to favourable business terms and to create the right buzz around its product.

Today, e-commerce accounts for about 2-3% of the total retail trade in India; but as is true in economies across the globe; it will gain traction in the coming years. To ensure a level playing field, there is a need for a comprehensive e-commerce policy applicable to both foreign and domestic players, rather than only a policy for FDI in e-commerce.

Benefits that these foreign players bring to the table – investments in modern warehousing, improvements in supply chain & logistics and widening the market base shouldn’t be ignored while arriving at a policy that will not only impact online trading, but also have a bearing on the overall economy.

By Anshuman Magazine, Head of India, South East Asia, Middle East and Africa.