Team Modi should legitimise direct selling by foreign companies in Indian retail — not just online but also offline — without any riders

In view of the complaints by the Confederation of All India Traders (CAIT) regarding blatant violation of the Foreign Direct Investment (FDI) policy and the Foreign Exchange Management Act (FEMA), 1999, by Amazon and Walmart-owned-Flipkart, Union Commerce Minister Piyush Goyal alluded to it while issuing a clarification to ensure that the e-commerce sector works “in the true spirit of the law.” Earlier in December 2020, the Ministry of Commerce had asked the Reserve Bank of India (RBI) and the Enforcement Directorate (ED) to take necessary action against these global e-commerce giants. The above actions may not enthuse when viewed in the backdrop of numerous such representations made in the past by CAIT and other associations of small traders, to no avail. At the outset, 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 (Press Note 3), 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 delivery, accepting payments, handling rejections, warehousing and so on. But, s/he can’t hold inventory and undertake direct selling. The permission for 100 per cent FDI in the marketplace is subject to two main riders, that is “the entity cannot 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.” Sans any mention as to “who the vendor is”, a firm linked to the marketplace — either its subsidiary or a Joint Venture (JV) with an Indian company — is eligible. Thus, contrary to the real 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/Walmart have been doing even though they came in as marketplace operators. A clarification to the Press Note 3 issued on December 26, 2018, said: “The owner of the marketplace or its subsidiary or its JV with an Indian company can’t have ownership of the seller.” Further, “a seller/firm on the platform can’t source more than 25 per cent of its inventory from a firm connected with the latter.” The owner can get around both; first, by having less than 50 per cent shareholding in the seller firm and argue, s/he has no control (albeit majority) over the latter and second, by its wholesale arm restricting supplies to the seller within the 25 per cent threshold.

As a consequence, the hold of e-commerce giants over Indian retail continues; they are dominant sellers themselves, giving little space to millions of small vendors for whose benefit this unique policy dispensation of marketplace was designed. Meanwhile, Reliance Industries Limited (RIL) which last year received a major foreign investment of Rs 1,50,000 crore (Rs 43,450 crore from US internet giant, Facebook alone) in its 100 per cent subsidiary Jio Platforms Limited (JPL) for total shareholding of 30 per cent has also joined the bandwagon. JPL has within its fold a range of businesses including e-commerce which is powered by JioMart commerce. The platform offers technology-enabled wherewithal to help 30 million stores to deliver products to consumers in the neighbourhood (the plan is to target a mammoth 400 million of them using the database of WhatsApp — a 100 per cent subsidiary of Facebook) at their doorsteps. The business model is a hybrid of online and offline retail which will also integrate with itself thousands of retail stores spread all over India operated by Reliance Retail Limited (RRL). Like Amazon et al, Reliance/Facebook, too, will be operating as direct sellers, controlling inventory, giving discounts and so on, which is not in sync with the policy on FDI in the e-commerce marketplace that prohibits the inventory model and direct selling. Yet, they can get around by citing that foreign shareholding in the seller firm is less than 50 per cent or a wholesaler linked to JioMart owner (Reliance/Facebook) will keep its supplies to the vendor within the 25 per cent threshold.  

The continued opaqueness in the policy — even after the clarification to Press Note 3 issued on December 26, 2018 — has ensured that the foreign majors don’t violate the rulebook even as their operations go against the very spirit of the policy. No wonder, numerous representations by CAIT et al as also petitions before the courts have failed as the latter go by the fine print, which suits these giants. It is therefore, unlikely that the latest action of the Commerce Ministry asking the RBI and the ED to take action against these global e-commerce giants will lead to any positive outcome.

What about the Ministry issuing a clarification to the rules to fully reflect the true spirit of the law as hinted by Piyush Goyal?

Thus, Press Note 3 can be modified to say that “the owner of the marketplace or its subsidiary or its JV with the Indian company can’t have even one per cent shareholding of the seller on the platform.” Further, “a seller/firm on the platform can’t source any supplies from a firm connected with the latter.” The above two stipulations will ensure that the owner of the marketplace platform has no connection whatsoever with the seller on its platform — neither by way of holding any shares in the latter’s firm nor making any supplies to it.

This way, the fine print will be in sync with the spirit of the policy i.e. to ensure that the foreign company only performs the role of bringing sellers and buyers on a common platform to conduct transactions and nothing beyond. Has the Government thought through the implications of going that far? Apart from being almost impossible to implement (this involves a microscopic watch on shareholding patterns including cross-holding through a maze of subsidiaries and JVs as also the stock flow of each and every seller on the platform; Alas! We don’t even have a regulator), this will tantamount to asking the foreign majors to pack up. This will be viewed as a retrospective change of policy and give a wrong signal about India not being an attractive destination.

For taking decisions, the investors are guided not merely by the declaration of intent but more importantly, they go by what the policy document says (this is what matters when courts pronounce their verdict). It is here that the Government faces a ‘Catch-22’ situation as the fine print of the 2016 guidelines permitted direct selling by marketplace owner (albeit indirectly).           

Now, if, the Government re-writes the Press Note 3 — as indicated above — foreign majors will be justified in arguing that this will be a retrospective change of policy; even the judiciary may uphold their stance. This course should be avoided. A pragmatic approach would be one wherein, Team Modi legitimises direct selling by foreign companies in Indian retail — not just online but also offline — without any riders. This will create a level playing field and enable all entities, including brick and mortar players, to accept FDI up to 100 per cent. Sans these changes, Indian retail will be cartelised by the likes of Amazon/Walmart and so on and those who know how to exploit the vagueness in extant policy dispensation, making the consumers vulnerable to exploitation in the medium to long-term. 

The writer is a New Delhi-based policy analyst. The views expressed are personal.