What next for e-commerce as DIPP says marketplaces flout FDI rules

What next for e-commerce as DIPP says marketplaces flout FDI rules

Thursday January 07, 2016,

5 min Read


E-commerce companies received a blow with the Department of Industrial Policy and Promotion (DIPP) stating that online marketplaces are not recognised in the country’s FDI policy. This comes just days before Prime Minister Narendra Modi’s unveiling of his Government’s Startup Action Plan.

The lack of clarity on FDI norms in e-commerce is a long saga – a group of offline retailers had petitioned against the permit of FDI for online marketplaces. They argued that marketplaces are essentially online multi brand retailers, making their foreign funding a violation of law. The Delhi High Court, in November, ordered the government to investigate 21 ecommerce companies for possible violations of FDI laws. Most of them claim to follow the marketplace model, in which they are not part of pricing or warehousing, but provide only technology and act as commission agents. According to an ET report, the DIPP seems to have accepted the offline retailers’ views.

Voonik, which was listed among the 21 websites, claimed to be a marketplace without separate arms for B2B and B2C. Sujayath Ali, Co-founder of Voonik, says: “Voonik is not even a direct marketplace; it works almost like an affiliated model- we generate the sale. Though the order is completed via our platform, others do the fulfilment.” Voonik takes orders from marketplaces like Fashionara and Jabong. “Once we get the ordered product, we give it to Jabong; they fulfill it,” Sujayath said. He added that the only confusion possible here is whether Voonik can have direct payment gateway. YourStory reached out to many of the big online marketplaces, including Flipkart, Snapdeal, Paytm and ShopClues. They declined to participate in this story.

What next?

There have been reports, on an off, of the Government investigating various online retailers. However, no action has so far been taken against these firms. Radhika Jain, Partner at financial advisory firm Walker Chandiok & Co LLP, says that it would be a drastic step if the government was to disallow marketplace model. “If that happens, it will stop all e-commerce in India. It is not as if these people sneaked into the country and did business in this model. Government has known about this.”

Radhika adds that eventually the Government will have to put all the various retail categories—single-brand, multi-brand and e-commerce—into one bucket. But, she said, this would take time.

But Arvind Singhal, Chairman of retail advisory firm Technopak, has a different view. He says: “It is not an act of parliament, not a finance bill or a constitutional amendment – if they want to do it, they can do it tomorrow itself. Not even security issues are discussed as much as retail issues.”

In fact, the current NDA government was against the previous UPA-II Government’s decision to allow up to 50% FDI in multi-brand retail. But the policies have not been changed yet.

Arvind added: “The government seems to have no understanding of retail business. They have come up with definitions [for retail] which are not in any other part of the world.” If the Government was to shut down e-commerce in India, he warns of the international uproar it will cause from investors and stakeholders across the world, as well as the huge consumer-base in India itself.

The Terminology Game

Curiously, FDI is allowed in B2B businesses, which marketplaces come under. It is this interpretation that many e-commerce marketplaces had held on to in order to justify the legality of their operations. This has led to companies setting up different B2B and B2C arms. Even this separation might not be enough if we go by DIPP’s latest statement.

K Vaitheeswaran, entrepreneur and e-commerce consultant, says that this confusion happened because of the media attention that spiced up the industry. “The industry aided the Government in treating e-commerce as a different model of retail altogether. But ecommerce is only a tiny part of India’s total commerce; there is no need for separate policies,” he added. He believes that although it is already late, the market is still growing, and any policy change can still make a difference. “In my personal view, they should allow FDI in retail. We have allowed FDI even in Defence manufacturing and Railways; why not in retail?”

YourStory take

India has been reluctant in accepting FDI in retail. Even after opening up the economy in the 1990s it seemed like the country had too many bad memories of the colonial past, which after all began with foreign traders. But how long should we be protective about our economy? Preventing international competition in Indian market was acceptable till a decade ago. But India has changed now, and so has its economy, and expectations from it. Foreign investors and companies could bring in more efficiency and Indian companies have shown they can take on global competition.

Of course, none of this would have been a problem if India had large domestic funds willing to invest in relatively risky and unproven sectors like e-commerce. For startups to grow in e-commerce and get ample funding there needs to be a conducive environment for investment to flow in.

The confusion caused by differing statements by different Government bodies harms investor and business confidence not just in e-commerce but across other industries.