#dnaEdit: Inclusive recipe

By allowing 100 per cent foreign direct investment in e-commerce marketplaces, the Centre has ushered in badly needed clarity that has been missing all these years. E-commerce companies like Flipkart, Amazon and Snapdeal have been operating under the marketplace model for some years now and have brought in nearly $10 billion in foreign investment in the past 10 years. They did so by labelling themselves as technology enablers who provide a platform for vendors rather than calling themselves e-tailers because of the ban on FDI in e-commerce. Many companies like Flipkart have also faced trouble from investigating agencies because of the vague rules. Only recently, the Department of Industrial Policy and Planning (DIPP) had told the Delhi high court that the marketplace model “is not recognised” in the country’s FDI policy. However, the new rules fall short of what the e-tailers have been clamouring, and even lobbying, for: permission to allow inventory-based model of e-commerce and FDI in it. On the contrary, the new rules might even lead to a government crackdown. 

Currently, e-tailers and their group companies are prevented from maintaining an inventory of goods and services and selling these directly to consumers. The idea was that e-retailers with their deep pockets would dominate the marketplace and not allow small vendors to flourish. However, e-retailers like Amazon and Flipkart have managed to sidestep these restrictions by forming two-tier companies whose front-end is owned by an Indian entity.

This entity is supplied with inventory by a separate company, which accepts the foreign investment, and operates as a wholesale supplier. When the government attempted to curb this by mandating that wholesale suppliers could not derive more than 25 per cent revenues from group companies, they began selling to other vendors to meet the 75 per cent external sales target. Now, the DIPP has mandated that e-commerce companies will not permit any one vendor or their group companies to exceed 25 per cent of the total sales in the marketplace. While this will allow more vendors space to compete against big entities, for expensive goods like electronics and high-fashion, there are few vendors who can cater to the high sales volumes. 

The new policy also aims to throttle the predatory pricing mechanisms that e-commerce companies have resorted to. It states that e-commerce companies will not “directly or indirectly influence the sale price of goods and services and shall maintain level-playing field”. This could address two unrelated concerns — one raised by brick and mortar companies that deep discounts fuelled by foreign money accorded an unfair advantage to e-commerce firms, and worries that e-tailers were burning cash irresponsibly and paving the way for a possible e-commerce meltdown. However, e-retail startups are fumbling for other ways to acquire customers. The new policy has continued to hold the ban on FDI in the business-to-consumer (B2C) segment. This is consistent with the Centre’s policy on preventing FDI in multi-brand retail. However, the online B2C segment has several young entrepreneurs and start-up companies and it may not be fair to deny them foreign investment and force them to rely solely on domestic angel investors, bank loans or IPOs. Nevertheless, in a push for Make in India, FDI in B2C e-commerce has been allowed for manufactures selling products made in India. This exception could also have been extended to companies that provide local services. A good FDI policy, like in the automobile sector, can ensure adequate capital inflows, boost efficiencies, promote sales and create jobs even while maintaining a level playing field. The new FDI policy for e-commerce makes a good start but enforcement of rules and periodic reviews will be key to improving it.