Allow 100% FDI in online, offline retail in all sectors

The Confederation of All India Traders (an umbrella organisation of small traders and businesses), has complained to the government that global e-commerce majors – Amazon and Flipkart - are giving huge discounts, selling exclusive brands and controlling inventory of sellers etc. All these are prohibited under the extant policy on foreign direct investment (FDI).

Promising action, Minister for Commerce and Industry Piyush Goyal has ordered collection of data on their financials, business model and operating practices. This is not a new development.

Ever since the guidelines permitting 100% FDI in the ‘market-place’ model of e-commerce were issued in early 2016 (Press Note 3), complaints of violations had been pouring in even as the then minister Suresh Prabhu promised action.

The matter also reached the Delhi High Court where a public interest litigation was filed. Even the Enforcement Directorate (ED) informed the court on October 31, 2018 that it was investigating violation of the Foreign Exchange Management Act against Amazon etc.

Yet, neither the investigations by the Department for Promotion of Industry and Internal Trade – nodal authority on FDI related matters besides ED - have progressed nor the courts have shown any alacrity in putting proceedings on fast track mode. The only significant development during this period was issue of a clarification to the Press Note 3 on December 26, 2018.

This has to do with the guidelines which were vague and non-transparent, enabling foreign majors to structure their business models in a manner as to go against the very spirit of the policy and yet maintain that they were not violating the rulebook.

To understand this, let us take a close look at the fine print. The ‘market-place’ (where the policy permits 100% FDI), is a platform where sellers and buyers meet to conduct sale and purchase transactions even as its owner (read: Amazon/Flipkart) merely acts as a facilitator. The owner of the marketplace provides services such as book orders, raise invoice, arrange delivery, accept payments, handle rejections, provide warehousing etc, all under one roof.

However, the foreign e-commerce major can’t own and control inventory. It can’t undertake ‘direct selling’ . This is in line with government’s policy of restricting FDI in multi-brand retail which at present allows 51% FDI in ‘offline’ retail and 100% FDI in food retail – both online and offline - subject to riders.

What safeguards are put in place to ensure this? As per the 2016 guidelines, ‘the market-place entity cannot permit more than 25% of total sales on its platform from one vendor or its group companies. It can’t directly or indirectly influence the sale price.’

This condition does not specify who the vendor is. Due to lack of such specification, a firm connected with marketplace (either its subsidiary or its joint venture with an Indian company) is eligible. In other words, each such entity could control up to 25% of sales or four of them could control all sales on the platform.

Any violation or otherwise has to be seen in relation to what is there in the rule book. Going by this, e-commerce majors were not violating the guidelines. Hence, all that resonated in the air was rhetoric but no concrete action as there was nothing to act upon.

The clarification issued on December 26, 2018 said that ‘the owner of market-place or its subsidiary or its joint venture with Indian company can’t have ownership of the seller’. Further, it said ‘a seller/firm on e-commerce platform can’t source more than 25% of its inventory from a firm connected with the latter’.

This seeks to implant the stated policy intent (read: foreign major can’t have any role in direct selling) in the fine print, something which was missing in PN-3.

This has made foreign majors jittery. So much so, CEO of Walmart (which had invested $16 billion last year to acquire 77% stake in Flipkart) has gone that far to say that ‘the amendment would tantamount to retrospective change in the policy’. But the expressed worry is unfounded as even these riders can be circumvented.

The market-place owner can play around with ‘...can’t have ownership of the seller’. Thus, he can have less than 50% shareholding in the seller firm and get around by arguing that he does not have majority ownership and control over the latter.

Continue supplies

As for the second rider, it can arrange for its wholesale arm (100% FDI is permitted here) to continue supplies to the seller but keep it within the 25% threshold. Similar arrangement can be put in place with other sellers.

The way architecture for FDI in e-commerce has been crafted, it would appear that the Centre is not interested in barring foreign investment in Indian retail. Instead, it wants to allow or else how can one explain ‘loopholes’ in the fine print (it doesn’t even have a regulator to do the monitoring and enforce rules)?

However, fearing that small traders would be up in arms, it has innovated the ‘marketplace’ to camouflage the real intent (a lingering concern that they would lose from opening up of retail to foreign investment is totally misplaced). This has done no good to any stakeholder, but has only added to the confusion and created uncertainty of the policy environment.

The government should shun the marketplace model and allow foreign investment from the ‘front door’. It should allow 100% FDI in retail for both online and offline in all sectors without any discrimination or favour.

This will provide stability of the policy environment and create a level playing field for all stakeholders. It is in the best interest of small traders as it will lead to all round development of the infrastructure and wide range of choice for sourcing products.

It will be pro-consumer in the long-run with many players catering to their needs at competitive/affordable price.

(The writer is a New Delhi-based policy analyst)