E-Commerce FDI Policy: Brief Analysis By Rajat Agarwal

On December 26, Government of India announced a new e-commerce policy which got applicable from February 1, 2019.

  • What’s all this about?

  • What are the changes which got implemented from 1st February 2019 in e-commerce space?

  • What are the pros and cons of this policy and for whom?

  • What will be the result of such policy in India?

On December 26, 2019, Government (herein referred as govt.) of India announced a major change in e-commerce policy like a change in FDI Policy, Deep Discounting issue, Inventory Based Model, RBI Compliance, etc. which was stated as a gift of Modi Govt. to offline small retailers and dealers etc.

In this article, we discuss the steps taken by the government and the impact of the same in the legal scenario.

Brief Description of Key Changes in Policy

The key points and issues taken care off under the new policy are-

1. Change in FDI (Foreign Direct Investment) norms for e-commerce companies in India.

2. Addressing the issue of Deep Discounting and Predatory Pricing, Zero Payment Offers, Flash Sales & unlimited offers.

3. No Control Over Inventory.

4. Sellers to be made accountable for services after sales.

5. RBI Compliance.

Change in FDI Norms

As per DIPP (Department of Indian Policy and Promotion) Govt. has allowed 100% FDI under e-commerce market-based model but prohibited FDI in inventory based model. India follows the B2B Model and restricted B2C model.

Note: -

1. Market-Based Model (B2B) - When with your online store various vendors from different geographical location get associated to sell their products while you will earn commission on the products sold, this model is called multi-vendor e-commerce.

Example - Amazon, Flipkart, etc.

2. Inventory-Based Model (B2C) - Under this model inventory of goods and services is owned and managed by the e-commerce entity and sold to consumers directly.

Deep Discounting and Predatory Pricing

As per new FDI Guidelines for e-commerce marketplace, it is no longer allowed to influence the sale price of goods or services directly or indirectly in order to promote level playing field. Services should be provided by e-commerce marketplace entity or other entity to vendors on the platform at arm’s length price and in fair and non-discretionary manner.

Note: -

1. Predatory pricing or Deep Discounting is the business strategies in which products are sold at extremely low prices, sometimes even lower than their costs, to attract new customers or create an artificial barrier of entry for existing or new competitors in the market.

No Control over Inventory

As per new DIPP rule, e-commerce marketplaces cannot own or control the inventory i.e. goods purported to be sold. Such ownership or control over the inventory will render the business into inventory based model (FDI is not allowed in inventory model). Inventory of the vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendors are from the marketplace entity or its group companies. Moreover, equity holder e-commerce marketplaces or its group companies, or having control on its inventory by e-commerce marketplace entity or group company are not allowed to sell its products on the platform run by such marketplace entity.

Example - Amazon with Cloudtail India.

Accountability to Sellers

Sellers are accountable for warranty/ guarantee of products sold via the marketplace. It has become mandatory for the marketplace to provide name, address and other contact details of the seller to customer. All post-sale activities will be the responsibility of sellers’ right from delivery of goods to the customers and customer satisfaction. Marketplaces are permitted to enter into transactions with registered sellers, that too only on a B2B basis.

RBI Compliance

As per the information published on DIPP’s website, now onwards e-commerce companies will be required to furnish a certificate along with a report of the statutory auditor to Reserve Bank of India, confirming compliance of guidelines, by 30th September of every year for the preceding financial year. The rule came into effect from February 2019.

Subject to the conditions of the FDI Policy on the services sector and applicable laws/regulations, security, and other conditions, the sale of service through e-commerce will be under the automatic route.

Impact of Policy & Consequences

The policy changes in the garb of clarifications have the potential to change the dynamics of Indian e-commerce space presently dominated by Walmart and Amazon who between them control more than 75% of the online retail market. In addition, the policy is likely to impact overall internet business space including digital payments space, logistics etc.

Example - The above changes are likely to impact the core business model of the likes of Amazon and Flipkart where they encourage sourcing and sales through their preferred vendors like Cloudtail and WS Retail amongst others as they have a direct or indirect equity stake in such preferred vendors. The customers buying products sold by these vendors are usually given additional benefits in terms of pricing, fast delivery, and cash backs etc. By virtue of overall control, they could provide large discounts, better user experience, and quality control. Furthermore, Amazon or Flipkart by virtue of their dominant positions now cannot insist on exclusive tie-ups with brand owners. Also, the private labels launched by Amazon and Flipkart now need to cede space to other players in the same category and cannot be indiscriminately promoted at the expense of other players.

The changes benefit brick and mortar small and medium retail players who for last decade have had to face an onslaught of indiscriminate discounting by the online players. Their lobbying has finally yielded the desired results. Indian retail giants like Future Retail will also benefit as they will be able to match the discounts offered by online retail while providing instant delivery.

Pure play marketplace like Snapdeal or Shopclues will also benefit from the change in policy. These marketplaces are not flush with VC money to offer deep discounts but generally seem to comply with the requirements.

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