Time for 100 per cent FDI in retail sector

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Time for 100 per cent FDI in retail sector

Monday, 18 September 2023 | Uttam Gupta

Time for 100 per cent FDI in retail sector

One hundred per cent Foreign Direct Investment should be permitted to all retailers, online or offline, big or small, for the growth of this sector

During discussions with representatives of e-commerce firms and a domestic traders' body viz. Confederation of All India Traders (CAIT)  held on August 2, 2023, the Department for Promotion of Industry and Internal Trade (DPIIT) in the Ministry of Commerce and Industry made a presentation on the 'fundamentals' of the proposed e-commerce policy. The policy is being deliberated since 2018.        

The DPIIT highlighted seven salient features of the proposed policy: unambiguous demarcation between the marketplace model where foreign direct investment (FDI) is allowed and inventory model where FDI is prohibited; making the policy congruent with the consumer protection rules; inclusive growth of micro, small and medium enterprises (MSMEs); enabling free and informed choice by onsumers; exports promotion; determining responsibilities of e-commerce entities; and stricter compliance to regulatory measures.

The government's main objective is to harmonize the interests of three key stakeholders viz. foreign investors, MSMEs and consumers. But, the manner in which various contours of the policy have evolved since the DPIIT made its first move on FDI in e-commerce in 2016, it is unlikely that this would happen. 

E-commerce is the process of selling goods and services over the Internet. In early 2016, the government allowed 100 percent FDI 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 by providing services such as booking orders, raising invoices, arranging the delivery, etc. She can't hold inventory or undertake direct selling.

The policy intent was abundantly clear. The foreign investor in the marketplace wasn't supposed to invest in inventory model. The 'demarcation' between the two models was intended when DPIIT came out with its Press Note (PN) in 2016. But, a clever bureaucrat blurred this demarcation while drafting the fine print. The PN (2016) prescribed two conditions. First, the foreign entity owning marketplace cannot permit more than 25 percent of total sales on the marketplace from one vendor or its group companies. Two, it cannot directly or indirectly influence the sale price.

In the absence of specifying as to who that vendor should be, it made way for a company linked to the owner of marketplace to get in. The latter could set up four companies (call them subsidiaries or JVs) and control 25 percent each of total sales on the platform. Contrary to the policy intent, which prohibited foreign investor in e-commerce, the fineprint did just the opposite.

Having allowed its entities to control almost all of the sales made on the marketplace, the second condition that the latter can't directly or indirectly influence the sale price is laughable.

The MSMEs who were impacted the most by this backdoor entry of Amazon, Walmart/Flipkart etc in direct selling complained to the government. In response, on December 26, 2018, the DPIIT clarified "the owner of the marketplace or its subsidiary or its joint venture (JV) with an Indian company can't have ownership of the seller." Further, "a seller on the platform can't source more than 25 percent of its inventory from a firm connected with the latter."

It is possible for foreign investors to circumvent the first rider by having less than 50 percent shareholding in the seller firm and arguing that they have no control (majority) over the latter. The marketplace owner can also sell his 'own' product - albeit through its wholesale arm - on the platform. All that the wholesale arm needs to ensure is to restrict supplies to the seller within the 25 percent threshold.

It isn't just a case of boundaries getting blurred. The offcial notes recognize and give legitimacy to the connection between marketplace owner and the seller. These don't prohibit foreign firms from keeping inventory and engage in direct selling to consumers. They are doing it at the cost of millions of small traders. For instance, only three dozen firms out of the 400,000 sellers on the Amazon platform account for 67 percent of sales on it. In this backdrop, one wonders as to how the new policy will promote inclusive growth of MSMEs.

The government is keen on making the policy congruent with the consumer protection rules. In 2020, the Department of Consumer Affairs (DCA), in the Ministry of Consumer Affairs, Food and Public Distribution, issued the Consumer Protection (e-commerce) Rules, under Section 101 of the Consumer Protection Act, 2019. The rules bar affiliated entities from selling on e-commerce platforms, restrict 'flash sales,' and disallow sellers from using the name or brand associated with the marketplace e-commerce entities for the promotion of goods.

In 2021, DCA made amendments to restrict business-to-business, or B2B, sales in e-commerce and a provision to prevent an 'abuse of dominant position' by e-commerce firms.

Making the new policy compatible with these rules would require establishing a total disconnect between the owner of the platform and the seller on it. In other words, the government wants to undo all that was done by the commerce ministry earlier. It will be tantamount to a retrospective change of policy and send a wrong signal to foreign investors. No wonder, large e-commerce companies are resisting the proposed changes. 

A fourth feature of the proposed policy is to enable 'free' and 'informed' choice (albeit for consumers). This would have been possible only when a large number of entities were able to sell on the platform in a 'fair' and 'non-discriminatory' manner. But, this isn't happening as the foreign major controls all the levers. Apart from its subsidiaries or joint ventures dominating the platform, even amongst others, the foreign firm decides as to 'who gets how much space and visibility'.        

As for exports promotion, the MNCs are here to avail of the ever-expanding opportunities in the Indian market and our policy makers have so far helped them by providing an enabling environment. The talk of promoting export through this route (read: e-commerce) doesn't pass muster.   

Fixing responsibilities of e-commerce entities assumes significance in the backdrop of multiple instances of consumers being duped. The foreign majors often get away from their responsibility to protect consumer by saying that they are 'intermediaries', hence they are not liable if any consumer is duped. The extant vague rules (2016/2018 press notes) enable them assume the role which suits them depending on the prevailing situation. 

Finally, as for stricter compliance to regulatory measures, to ensure this,  the rules need to be crystal clear in the very first place. When, these are vague and susceptible to varied interpretations, it will be difficult to prove violation. That apart, so far the government hasn't even mooted the idea of setting up a regulatory authority.     

The present mess owes it to the very idea of marketplace which is flawed. When, the government expects foreign company to do almost everything that a retailer does viz. booking order, raising invoice, arranging delivery, accept rejection and so on, how can the former deny the latter right to sell? The way forward is to shun this idea; instead allow 100 percent FDI in retail.

In fact, the bureaucrats had already done it but in a 'subtle' way. The government should make it obvious and straightforward. Moreover, 100 percent FDI should be permitted to all retailers, online or offline, big or small for a level playing field.

(The writer is a policy analyst)

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