FDI in retail: The way forward

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FDI in retail: The way forward

Tuesday, 08 January 2019 | Uttam Gupta

Only a 100 per cent FDI can create good market dynamics that can address concerns of predatory pricing and market dominance

Retailers’ associations have complained to the Government against e-commerce majors such as Amazon and Flipkart giving deep discounts on sales on their platform which is detrimental to the ubiquitous ‘mom-and-pop’ stores. They also apprehend that once the latter is decimated, the former will start exploiting the consumers in the long-run by charging exorbitant prices. Domestic companies in organised retail (or the so-called ‘brick and mortar’ segment) viz Reliance Retail Limited (RRL) and Futures Group among others, too, are facing the heat from these e-commerce giants. They are not against MNCs per se but their grudge is mainly due to the lack of a level-playing field with regard to access to foreign direct investment (FDI) in multi-brand retail (MBR).     

Under a policy announced in 2012, 51 per cent FDI was allowed in MBR but conditions such as minimum investment of $100 million, 30 per cent sourcing from local small enterprises and prior approval of the concerned state and much more, made it a virtual non-starter. Global majors are also facing charges of money laundering and violating extant guidelines pertaining to FDI. These are being investigated by the Enforcement Directorate (ED) under the Foreign Exchange Management Act. So, what is the Government doing to stem the tide? Are not there safeguards in the policy governing the entry of MNCs and their operations? Under Press Note 3 (2016-17), it allowed 100 per cent FDI in ‘marketplace’ model for e-commerce — an entity working on this model offers a platform to sellers and buyers to conduct transactions. It is expected to act merely as a facilitator. It can’t own stocks and sell them directly to the consumers. It also can’t permit more than 25 per cent of total sales on its platform from one vendor or its group companies. Further, it can’t directly or indirectly influence the sale price. For an entity owning stocks and undertaking direct selling to the consumers, FDI is prohibited.

So, the guidelines have enough safeguards in place. They bar marketplace entity from giving discount, prevents it from undertaking direct selling and does not allow companies owned/controlled by it to dominate the platform. Yet, these are being violated with impunity. Foreign majors have an ingenious architecture in place to indulge in direct selling without playing foul of the rules. They appoint entities fully owned by it as wholesalers/distributors. Wholesalers buy in bulk from brand owners/manufacturers and sell to vendors at discounted price (this was confirmed by findings of the Competition Commission of India while clearing the acquisition of Flipkart by Walmart) who in turn sell the products on online market place owned by the foreign major. Who are these vendors on whom 100 per cent subsidiaries of the foreign major (read: wholesalers) shower so much benevolence? Are they related or unrelated entities? Are they proxies? A vendor/seller normally carries out all functions — sourcing, purchase, handling, stocking and distribution — eventually leading to sale to the consumer. In this case, however, all these functions are performed by the foreign major and its subsidiaries. The so-called vendor has no value addition to make, yet he is a very crucial person in the whole architecture.      

The owner of marketplace or its subsidiary/wholesaler can’t show itself in this role as this will be deemed as an inventory model wherein an entity undertakes direct sale to the customer, and FDI is prohibited. So, it engages with what one may refer to a ‘proxy seller’ to ensure compliance with rules. A task force under Rita Teaotia Commerce Secretary had recommended measures viz capping of discounts, a sun-set clause on discounts and a regulator to enforce provisions of PN-3. It also mooted a dedicated cell in ED to investigate violations. This is sheer posturing as bureaucrats have written the rules in a manner to allow 100 per cent FDI in MBR in the garb of marketplace. This platform is so defined that it can bring within its fold almost everything that a seller does. The only thing left out is ownership of the stock which these MNCs take care by using ‘proxies’.

Foreign investment in Indian retail is the way forward. Apart from bringing the much-needed capital, FDI helps in filling the void in infrastructure for procurement, handling, storage, distribution and quality. It poses no threat to mom-and-pop stores which can co-exist with foreign retailers. But we have a plethora of policy dispensations for FDI in retail: Around 100 per cent in single brand (online and offline); 51 per cent in multi-brand (offline); 100 per cent market-place (e-commerce); 100 per cent food sourced ‘locally’ (online and offline). Each dispensation is subject to a specific set of condition which makes the policy environment hazy, gives rise to discretion and creates fertile ground for lobbying. The Government should dismantle these regimes based on arbitrary distinctions. It should allow 100 per cent FDI in retail in both online and offline without any riders. This will create market dynamics that will address concerns of predatory pricing and market dominance.

(The writer is a freelance journalist)

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