Author: Praveen Singhal | CFO | Maier+Vidorno
First published in May 2016
Cross-border E-Commerce in India is extremely interesting – both for Indian companies and for foreign companies wanting to reduce entry barriers and increase opportunities for buyers and sellers to better find and target each other. India’s markets have such potential – especially with ever increasing smart phone ownership and such a young population becoming ever more tech-savvy. But the regulations around e-commerce were until recently wrapped up in double protectionism – protecting Indian brands and protecting “offline” stores who fear loosing out to online shopping. Recently the Government of India clarified regulations for foreign direct investment – but what do they really mean for international companies wanting to sell in India over the internet?
100% Foreign Direct Investment (“FDI”) in E commerce Sector – Background
International companies have been able to sell goods and services to other businesses since 2015 (with 100% FDI permitted under automatic route for B2B (Business to Business) e–commerce), but there were heavy restrictions on B2C (Business to Customer) with a few limited exceptions:
- Manufacturers selling products manufactured in India can sell through e-commerce retail
- Single brand trading entities who are operating through brick and mortar stores
- Indian manufacturers selling their own single brand products through e-commerce retail
The “Revised Position”
The Government of India has come up with a long awaited clarification to the policy in March 2016 end, permitting 100% FDI in the “online marketplace model”. Under this model the inventory being traded is not owned by the entity offering the e-commerce services, who only provides the information technology platform on a digital and electronic network – and so acts as facilitator between buyer and seller. This revision comes with a lot of conditions:
- The Marketplace e-commerce platform can provide support services to sellers like logistics, warehousing, call center, payment collection and other services
- The Marketplace e-commerce entity can enter into transactions with sellers registered on its platform on B2B basis
- The payment mechanism facilitated by the e-commerce entity must conform with the Reserve Bank of India guidelines
- The entity engaged in the business of e-commerce will not influence the prices of goods/services sold on the platform and will “maintain the level playing field”
- No seller on market place will contribute more than 25% of the turnover of the total sales generated by the e-commerce entity
- The name & contact details of the seller has to be on website
- After-sales activities are completely the responsibility of the seller. The entity involved in e-commerce can’t offer this service
- If a marketplace e-commerce entity owns the goods to be sold in the marketplace then this will amount to an “inventory based e-commerce model”
The March 2016 revision still does not permit 100% FDI under the “Inventory based model” of e-commerce, where the inventory of goods and services is owned by the e-commerce entity and sold directly to customers.
Although this move of Government of India to liberalize the e-commerce sector brings clarity, it also open doors to many issues. Companies engaging in inventory as well as market place model of e-commerce business may have to restructure their business model to make it a market place model so that they can benefit from the 100% FDI under the automatic route. They will also have to follow the 25% norm and provide details of the sellers – which may become a tedious task in some scenarios. Not only this, but since e-commerce entities are prohibited from influencing the price, they may not be permitted to offer discounts and daily reduced prices – which has been one of the major factors attracting consumers to the e-commerce platform.
Even with these restrictions, the clarification has been welcomed by major online players in India like Flipkart, Snap deal, Amazon, and old brick and mortar retail giant Future group has also termed it as a “move in right direction” as most think there is enough liberalization in the new policy to attract more foreign investors, which will eventually benefit the e-commerce sector – a sector that is gaining momentum in the Indian market and has enormous potential.