FDI Policy On E-Commerce Retail: Time Ripe For A Reworking?
Indian rupee and U.S. dollar banknotes. (Photographer: Dhiraj Singh/Bloomberg)

FDI Policy On E-Commerce Retail: Time Ripe For A Reworking?

BloombergQuintOpinion

The Indian government has been striving to effectively regulate India’s e-commerce retail market, since its first attempt in 2000. The regulations have been a by-product of the fear of organised global retail with deep pockets adversely affecting scores of unorganised “mom-and-pop shops” and retailers. The Indian foreign direct investment policy on e-commerce retail has been amended several times, and the e-commerce business houses operating in India have restructured themselves to fall in line with every such change in policy without significantly altering their operations.

In the latest episode of this ongoing saga, the Government of India issued a Press Note No. 2 (2018 Series) on Dec. 28, 2018, to effectively legislate against e-commerce entities that disguise their inventory-based business models[1] as marketplaces[2]. Reportedly[3], Walmart-backed Flipkart and Amazon India are undergoing complex structuring and restructuring to align themselves with the amended policy. This to and fro between the Government and e-commerce players has not only been unproductive for the country’s economy, but is also against this Government’s stated objective of certainty and Ease of Doing Business in India. While the effective implementation of the regulations governing e-commerce retail continues to be a significant issue, there are certain other fundamental concerns relating to the approach of the Indian government towards e-commerce retail, which require immediate consideration.

Foreign E-Commerce Versus Domestic E-Commerce

Inexplicably, the Indian government discriminates between foreign funded e-commerce marketplaces and domestic funded e-commerce marketplaces. The Consolidated Foreign Direct Investment Policy 2017 prohibits foreign-funded marketplace players from engaging in inventory-based model of e-commerce, but there is no such bar on domestic-funded marketplace players. Similarly, foreign-funded entities operating as marketplaces have to comply with certain prescribed conditions, however, domestic-funded marketplaces are exempted from such requirements. Ostensibly, the intent for restrictions on the inventory-based model is to protect the conventional brick and mortar stores from the deep-pocketed e-commerce marketplace entities. However, there is then an inherent fallacy in the discrimination between foreign funded and domestic funded e-commerce entities, as there is no reason to believe that deep-pocketed domestic players cannot cause equivalent harm to the conventional brick and mortar stores.

Restrictions On Online Market Versus Restrictions On Offline Market

While brick and mortar stores have some natural limitations such as narrow geographical reach, limitation on inventory and variety of items stocked, high maintenance cost, lack of access to consumer data etc., the Indian legal framework is also stacked against them in terms of the number of consents / permits needed to operate the business, number of state and central law compliances, inability to operate 24x7 and employment of labour. For instance, consider the pharmaceutical sector, where offline pharmacy shops are required to comply with various conditions such as maintaining adequate storage requirements for different drugs, licensing requirement for selling specific drugs, selling certain drugs only under the personal supervision of registered pharmacist, etc., applicability of these conditions to online pharmacies is unclear. Even assuming these limitations are applicable, it would be practically very difficult to ensure that they are actually complied with. Such differential applicability of legal regulations has made it tougher for physical stores to effectively compete with their online counterparts. As such, a uniform set of regulations applicable to both markets may prove to be beneficial for the retail industry in India.

Marketplace Model Versus Multi-Brand Retail

The FDI Policy permits 51 percent foreign investment in multi-brand retail, subject to approval of the Indian government and fulfilment of certain conditions including the foreign investor needing to bring in a minimum of $100 million; 50 percentof the total foreign investment being invested in backend infrastructure (including investment towards processing, manufacturing, storage etc.); and the multi-brand retail stores having to be set up only in cities with a population of more than 1 million. However, no FDI is permitted in e-commerce multi-brand retail. The Indian government also views e-commerce platforms operating on an inventory-based model as disguisedly engaging in multi-brand retail.

Certain quarters have argued that most e-commerce platforms intrinsically engage in multi-brand retail irrespective of their business model. Evidence-led analysis of e-commerce marketplaces[4] shows most of them sell a diverse range of products from several different brands, run discount schemes, offer a variety of payment options and transactional support services, offer services such as home delivery, return of products and refund of money etc. – each similar to (or more enhanced than) multi-brand retail stores. Given this, it is difficult to differentiate the business and service offerings of e-commerce platforms from physical multi-brand retail stores. Could it then be said that, not only are e-commerce platforms engaging in prohibited multi-brand retail (albeit online), they are also avoiding compliance with respect to conditions associated with foreign direct investment in offline multi-brand retail stores?

Is It Time To Relook At The Policy On Indian Retail?

According to a report by World Economic Forum[5], India will be the world’s third-largest consumer market by 2030, behind the US and China. As such, India has the potential to leverage its consumer demand against foreign players eyeing to exploit the Indian consumer market. The existing guidelines in the retail sector are unappealing. Also, with lines between e-commerce and traditional retail commerce blurring, it is may be time for the Government takes a relook at the policy on Indian retail and strives for harmonisation of laws governing the retail industry as a whole.

The retail market should be regulated as a single market regardless of it being a brick and mortar store or an e-commerce platform. The distinction between single-brand retail and multi-brand retail could continue, however, it is should apply uniformly to online and offline retail market. In light of the FDI Policy, FDI in single-brand retail could be permitted up to 100 percent (approval required beyond 49 percent) and in multi-brand retail could be permitted subject to entry restrictions. The entry restrictions may be made more stringent for certain category of market players, depending on several factors such as their turnover and net-worth calculated on a consolidated basis (aggregate of their online and offline operations), but not on the basis of funding being foreign or domestic. The entry restrictions could be with regard to minimum investment in development of back-end infrastructure, technological innovation, supply chain optimisation, employment generation, collaboration with local players, storage of consumer data, etc., depending on the sectors which need immediate improvement (for instance, Indian food supply chain is in desperate need of development and optimisation). Such restrictions would not only expand the retail market in the country, but would also result in the development of necessary infrastructure and integrate the traditional “mom-and-pop shops” with the e-commerce market.

The New Draft National E-Commerce Policy: A Step In The Right Direction?

The Indian Government on February 23, 2019, released the draft national e-commerce policy (“Draft Policy”) for comments from stakeholders. The Draft Policy deals with six major issues under the e-commerce ecosystem: (i) data; (ii) infrastructure development; (iii) e-commerce marketplaces; (iv) regulatory issues; (v) stimulating domestic digital economy; and (vi) export promotion through e-commerce. The Draft Policy equates the data of individuals residing in the country with national asset, such as oil or spectrum, that the government holds in trust, but rights to which can be permitted. The Draft Policy prescribes that a business entity that collects or processes any sensitive data in India and stores it abroad, shall not make such data available to any other business entity / third party outside India or to any foreign government without prior permission from Indian authorities.

With respect to e-commerce marketplaces, the Draft Policy reiterates the basic provisions of FDI policy in e-commerce and prescribes the following additional conditions applicable to e-commerce marketplaces, inter alia: (i) all product shipments from other countries to India shall be channeled through the customs route, (ii) all e-commerce sites / applications available for download in India shall have a registered business entity in India as the importer on record; (iii) all e-commerce sites / apps shall have maximum retail price on all packaged products, physical products and invoices; (iv) e-commerce entities shall disclose to the consumer, the purpose and use of data collection upfront, in a simplified and an easily understandable form on their websites/ application interfaces; and (v) other measures in relation to counterfeit products, piracy, authentic reviews, customer service. Though the Draft Policy acknowledges the importance of integrating small traders and manufacturers with online market, but it fails to provide any substantial strategy to achieve it. Certainly, the Draft Policy is a step in the right direction. However, the policy on e-commerce retail still requires a major relook.

Conclusion

Although, India has the second-largest internet market and smartphone market in the world, the online retail market constitutes a miniscule 3 percent of the total retail market in the country. The legal framework regulating the retail market in the country is one of the key reasons for such limited penetration of online market. Despite the legislative policy on e-commerce being amended a few times in recent years, it has failed to achieve the desired results. The aim should be to integrate the online marketplaces with the offline markets and ensure that they coexist peacefully.

In the wake of Jeff Bezos announcing Amazon’s plans to invest $1 billion to digitize ‘kirana stores’, Flipkart investing in Shadowfax and Reliance launching JioMart, the advantages of integration are becoming clearer to the market – faster last mile delivery and storage solutions (Amazon program to on-board “mom-and-pop shops” is unmistakably dubbed ‘I have space’). Given these market changes, the government should revisit the legislative policy and reconsider its approach of regulating e-commerce retail and offline retail differently. Indisputably, conventional retail stores are required to be protected, but it should not happen at the cost of technological advancement.

[1] An inventory-based model of e-commerce has been defined to mean an operating model where inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly.

[2] A marketplace based model of e-commerce has been defined to mean an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.

[3] Restructuring underway at Flipkart and Amazon India affiliate sellers, February 7, 2019 (available at: https://www.business-standard.com/article/companies/restructuring-underway-at-flipkart-and-amazon-india-affiliate-sellers-119020700540_1.html).

[4] Market study on e-commerce in India, Key Findings and Observations, Competition Commission of India, January 8, 2020

[5] World Economic Forum, Future of Consumption in Fast-Growth Consumer Markets: INDIA, January 2019.

This article was authored by Pooja Patel - Partner in the General Corporate Practice at the Mumbai office, and Siddharth Anand - Senior Associate in the General Corporate Practice at the Mumbai office, of Cyril Amarchand Mangaldas, and was originally published on the Cyril Amarchand Mangaldas blog.

The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.

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