A pragmatic approach would be one wherein the Modi Govt legitimises direct selling by foreign companies in Indian retail in all forms
For the last couple of years, the Confederation of All India Traders (CAIT) was complaining about a blatant violation of the Foreign Direct Investment (FDI) policy and the Foreign Exchange Management Act (FEMA) by global e-commerce players like Amazon and Walmart-owned-Flipkart, etc. Addressing their concerns, the Ministry of Commerce and Industries in December 2020 asked the Reserve Bank of India and the Enforcement Directorate to take action against these global giants.
Earlier this year, Commerce Minister Piyush Goyal promised to ensure that the e-commerce sector works “in the true spirit of the law”. As a follow-up, the Ministry of Consumer Affairs proposed a set of new rules called Consumer Protection (e-commerce) Rules, 2020, to be implemented factoring in the views of industry (e-commerce giants included) and other stakeholders.
Aimed at all e-commerce entities that are not established in India, these rules require every e-commerce outfit that intends to operate in India to (i) register itself with the Department for Promotion of Industry and Internal Trade (DPIIT) - the nodal authority in the Commerce Ministry that deals with trade and commerce-related issues including foreign investment; (ii) bar affiliated entities from selling on the e-commerce platform and restricting ‘flash sales’ (an acronym for online sales for a very short period of time that offers substantial discounts or promotions); (iii) disallow seller from using the name or brand associated with that of the marketplace e-commerce entity for promotion or offer for sale of goods.
To understand the implications of the above restrictions as also those already in place (bar on firms controlled by the e-commerce major from selling on its platform; prohibition on the latter having ‘exclusive arrangement’ with preferred sellers, etc.), let us take a look at the extant FDI policy under which Amazon and Flipkart have come to India. As per the guidelines issued in early 2016, 100 per cent FDI is allowed under the so-called marketplace model.
The marketplace is a platform where vendors sell their products to consumers even as its owner merely acts as a facilitator. The marketplace owner provides services such as booking orders, raising invoices, arranging the delivery, accepting payments, handling rejections, warehousing and so on. However, the person cannot hold inventory and undertake direct selling. This is in line with the philosophy of the Bharatiya Janata Party to disallow FDI in Indian retail: In 2012-13 when the then UPA - Government brought a proposal for FDI in retail (albeit physical format or the so-called ‘brick and mortar’), this was opposed by BJP.
In recent years, however, with a phenomenal growth of online retail sales, even as the incumbent Government wanted this segment to benefit from FDI, associated technologies, and best global practices in all areas of the supply chain in sync with its underlying philosophy, it did not want to allow the likes of Amazon and Flipkart to undertake direct sales to Indian consumers. This posed a serious dilemma as the real business opportunity being in direct sales, how could the latter come under a policy regime that prohibits it?
The clever bureaucrats gave a way out of this dilemma to their political masters. They drafted the conditions for FDI in the e-commerce marketplace in a manner that these multinationals got into ‘direct selling’ without appearing to be explicitly doing so. Thus, Press Note 3 prescribed two conditions for their entry into market place — (i) “the entity cannot permit more than 25 per cent of total sales on its platform from one vendor or its group companies; (ii) it cannot directly or indirectly influence the sale price.
Without any mention of who the vendor is, a firm linked to the marketplace either its subsidiary or a Joint Venture with an Indian company is eligible. As for the second condition, it is not easy to establish that the owner of the market place has manipulated the sale price. In view of the above, contrary to the declared intent of the policy, which disallowed the marketplace owner from direct selling to individual consumers, the fine print permitted them to do so - albeit by its subsidiary or JV. This is precisely what e-commerce majors such as Amazon and Flipkart have been doing even though they came in as marketplace operators.
A clarification issued on December 26, 2018, said: “The owner of the marketplace or its subsidiary or its JV with an Indian company cannot have ownership of the seller.” Further, “a seller on the platform cannot source more than 25 per cent of its inventory from a firm connected with the latter”. The owner can get around both in two ways - one, by having less than 50 per cent shareholding in the seller firm and argue that he or she has no control over the latter and two, by its wholesale arm restricting supplies to the seller within the 25 per cent threshold.
Despite the clarification, the hold of e-commerce giants over Indian retail continues. They are dominant sellers themselves. Just about three dozen firms out of a total of 400,000 sellers on the Amazon platform account for two-thirds of the sales made on it. This is not a bolt from the blue. It is the inevitable outcome of a policy that allowed FDI in online retail albeit through the backdoor.
Following mounting pressure from traders and small businesses, the Government claimed that it will not tolerate any connection in whatever form between the sellers on the one hand, and the platform owner on the other. However, that is plain rhetoric as there is nothing to back it up. As long as the core of PN 3 which gives legitimacy to the presence of e-commerce majors as direct sellers remains, they have nothing to worry about unlike the small traders and businesses. Then, what is the way forward?
A genuine response to their demand would require the Government to drastically alter PN 3 to say that “the owner of the marketplace or its subsidiary or its JV with the Indian company cannot have even one per cent shareholding of the seller on the platform”. Further, “a seller or firm on the platform cannot source any supplies (not even one unit) from a firm connected with the latter”. This will ensure that the marketplace owner has no connection whatsoever with the seller neither by way of shareholding int he latter’s firm nor making any supplies to it.
Ensuring compliance with such a rigorous stipulation is, however, a Herculean task. It is impossible (this would involve a microscopic watch on shares held by e-commerce majors in seller firms as also the stock-flow of every seller). Even worse, it is tantamount to asking the foreign majors to pack up. It will be viewed as a retrospective change of policy and give a wrong signal about India not being an attractive destination. This course should be avoided.
A pragmatic approach would be one wherein the Narendra Modi government legitimizes direct selling by foreign companies in Indian retail in all forms without any riders. This will enable all retailers, small or big, online or offline, to get access to FDI and compete with one another on equal terms. It will be a win-win for all stakeholders including millions of small traders and consumers. This will also be the best bet for boosting investment, growth, and jobs.
(The writer is a policy analyst. The views expressed are personal.)
