Why e-com biz requires more investment

It would be a mistake to view the competitive landscape of ecommerce in India from the narrow prism of foreign direct investment (FDI). Yet the role of FDI in facilitating economic integration and development, enhancing technology and management skills and influencing a positive effect on India’s balance of payments cannot be undermined.

Multinational corporations are an important source of intellectual property, international capital and state of the art technology and consequently their expansion to India achieves the key objective of bringing best practices and transferring technical and business knowhow to the local business communities. This also supports in enhancing opportunities for expanding and scaling business, leads to productivity gains and promotes competitiveness among small and medium enterprises. 

Consequently, the permission of foreign investment of up to 100% in an ecommerce company under the automatic route (that is, without an approval from the government) since 2000 was a positive measure. 

These FDI regulations clearly specified that the automatic route was restricted to business-to-business organisations and did not extend to retail in ecommerce (i.e. business-to-consumer organisations). The erstwhile policy also categorically stated that specific restrictions that applied to domestic trading would continue to be applicable to ecommerce as well. Thereafter, while the FDI policy on retail witnessed several other changes since 2000, it remained relatively static in the vertical of ecommerce until the end of 2015.

As there has been a lot of criticism against ecommerce companies over FDI norms, it is important to revisit the guidelines of 2016 on FDI in ecommerce. The new guidelines dichotomised the models of ecommerce into an ‘inventory-based model’ and the ‘marketplace-based model’.

This distinction became necessary to ensure that the relaxation that was provided for B2B models or marketplace-based models was confined to ecommerce entities that were merely acting as facilitators between sellers and consumers for a commission, without actually selling goods or provide services directly to the consumers. 

Consequently, ecommerce activity where the inventory of goods and services were owned by the ecommerce entity and sold directly to the consumers, did not qualify for the automatic route for FDI. The inventory-based model is essentially a B2C model where the ecommerce entity has ownership over the goods and the sale of goods and services takes place between the e-commerce entity and the end consumers. 

Marketplace-based model

It follows that the main characteristics of a marketplace-based model are the provision of an information technology platform by an ecommerce entity on a digital or electronic network. A marketplace-based ecommerce entity does not own any inventory by itself and in the event it gains ownership over such products and services, then it would be considered to be an inventory-based ecommerce entity, where FDI is not permitted through the automatic route.

The rationale is simple - if an ecommerce entity with FDI uses an inventory-based model, then it could be considered to be undertaking multi-brand retail trading ecommerce, where FDI is permitted up to 51% under the approval route, subject to certain funding, sourcing and other conditions.

The FDI policy on multi-brand retail ecommerce by Indian companies with FDI, however, did not change and the restriction continued by implication. Consequently, Indian companies with FDI, engaged in multi-brand retail trade, are not permitted to undertake B2C in the form of multi-brand ecommerce.

Solutions take time to evolve and whichever way one examines the impact of FDI in the space of ecommerce, what cannot be ignored is the fact that large FDI investments is the need of the hour in every sector. And ecommerce is no excpetion. 

Despite acknowledging various views on the topic, the aspects that should assume the maximum importance are (a) the contribution of multinationals to setting benchmarks of technology and efficiency; (b) their role in helping break supply bottlenecks; (c) the impact of their demonstration of new technologies; (d) their ability to stimulate competition, transfer  techniques for inventory and quality control and standardise supplier and distribution channels; and (e) their ability to influence local firms to increase their managerial efforts, or to adopt some of the marketing techniques used by MNCs (f) and last but not the least, their alignment to promote ‘Make In India’ that will support employment generation. In the current scenario, it is possible that there is an intrinsic irony in a transformative agenda - where the greater the effort to progress and achieve harmony, the greater will be the discord.

(The writer is Managing Partner at MGC & KNAV Global Risk Advisory LLP )