Recently, the Ministry of Commerce & Industry reviewed and amended the Foreign Direct Investment (FDI) Policy in e-commerce in order to ensure a level playing field between offline and online sectors. E-commerce firms are needed to comply with the new guidelines by February 1, 2019.
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Learn the Basics
What is e-commerce?
E-commerce refers to buying and selling of goods and services including digital products through a digital/electronic network.
What is an E-commerce entity?
An e-commerce entity is a company incorporated under the Companies Act 1956 or the Companies Act 2013 or a foreign company covered under the Companies Act, 2013 or an office, branch or agency in India operating under FEMA regulations, owned or controlled by a person resident outside India and conducting e-commerce business.
What are the types of E-commerce models?
Based on inventory, e-commerce can be classified into
- Inventory based model: It is an e-commerce activity wherein the inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly through a digital platform.
- Marketplace based model: It is an e-commerce activity wherein the e-commerce entity facilitates commerce between buyers and sellers (who owns inventories) through a digital platform.
Based on the participants, e-commerce can be classified into
- B2C (business to customer): It is the business model in which businesses sell products or services to consumers.
- C2C (customer to customer): It is the business model that facilitates commerce between private individuals. Whether it’s for goods or services, this category of e-commerce connects people to do business with one another.
- B2B (business to business): It is the business model that facilitates commerce between businesses.
What are the salient features of the recent amendments?
Following are the major provisions for FDI policy in the e-commerce sector after the amendment.
- E-commerce entities can engage only in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce.
- 100% FDI under automatic route is allowed in the market place model, whereas, no FDI is permitted in inventory based model.
Ownership over inventory
- Market place e-commerce entity should not exercise ownership or control over the inventory.
- If more than 25% of the inventories of an E-commerce entity are linked to a single seller, it ceases to be an intermediary between buyers and sellers.
- Entities with the above features will be treated as an inventory based model rather than a market place model.
- An e-commerce market place entity having equity participation in another entity will not be allowed to sell the latter’s products on its own platform.
- Therefore, a product in which, say, for example, Amazon or Flipkart have a stake cannot be sold on their respective platforms.
- In a marketplace model, goods or services for electronic sale on the website should clearly mention the name, address and other contact information of the seller.
- After the sale is made, delivery of goods to the customers and their satisfaction will be the seller’s responsibility.
- Furthermore, an e-commerce marketplace entity should not mandate sellers to sell any product only on its platform.
- Market place e-commerce entities should not directly or indirectly influence the sale price of goods or services and should maintain a level playing field.
- The cashback provided by the sellers to buyers should be fair and non-discriminatory in nature.
What are the potential benefits of these amendments?
- E-commerce Market place players cannot influence price + cannot mandate sellers to sell exclusively on its platform = No deep discounts offered by retailers that have a close association with marketplace entities = Relief to small retailers selling on these platforms + Traditional brick & mortar stores could also gain as they were earlier affected by the monopoly of large e-commerce retailers.
- Hence these changes will enable a level playing field for all sellers, helping small retailers, including MSMEs, to utilise the reach of e-commerce.
What are the concerns with these amendments?
On Cashbacks and Discounts rules:
- The amendments restrict cashback services and exclusive discounts on e-commerce platforms.
- But it is illogical considering the fact that the offline ones are allowed to display their own labels.
- In the case of anti-competitive practices like deep discounts, the marketplace can self-regulate or the competition commission of India (CCI) can intervene.
- However, the amendments went against the government’s assurance of ‘minimum government, maximum governance’, through tough regulations.
Indifferent to consumers’ choice and welfare
- In a retail market as large and diverse as India’s, e-commerce retailers still play a smaller role and the brick & mortar retailers play a major role.
- But instead of promoting the sector, the amendments try to curb the expansion options for retailers from the e-commerce sector and as a result, it is indifferent to consumer choice and welfare.
On equity restrictions
- The rule that an e-commerce market place entity having equity participation in another entity will not be allowed to sell the latter’s products on its own platform = considerable impact on the business model of e-commerce entities since most of them source goods from sellers who are related party entities + adversely impact their backend operations since group entities will have to be removed from the e-commerce value chain.
- For instance, Cloudtail India Pvt Ltd is the biggest retailer operating on Amazon and this shows a clear link with Amazon. However, under the new rules, Cloudtail, in which Amazon holds an equity stake, may not be able to sell products on Amazon’s e-commerce platform.
- Under the new rules, an e-commerce marketplace entity should not require any seller to sell the product only on its platform.
- However, there is no explanation on what to do when a seller voluntarily decided to sell exclusively on one e-commerce portal over another.
What is the way forward?
- The amendment to the FDI in e-commerce policy will have an impact on e-commerce giants, ensuring a level playing field between offline and online sectors.
- The changes are crucial since their implementation will impact the flexibility that e-commerce platforms had in doing business and influence them to be neutral to all sellers.
- The timeline (Feb 1, 2019) to comply with the changes may, however, need to be revised since companies will need to study the latest amendments in detail and may need to bring about many operational changes.