Decoding the Myth and Mystery of 100% FDI in E-commerce , looking at all aspects of how 100% FDI in e-commerce will pan out and what it means for the retail industry as a whole .
To bring a sense of clarity in the Indian e-commerce space, the government has now given a go ahead, allowing 100% Foreign Direct Investment (FDI) in the marketplace model of e-commerce retailing. The growing popularity of e-commerce and contentious rivalry between online sellers and brick and mortar retail store owners over predatory pricing meant it was time the government took a proactive step in resolving the growing disparity. Here is a look at all aspects of how 100% FDI in e-commerce will pan out and what it means for the retail industry as a whole, including its
impact on online sellers, buyers and brick and mortar store retailers.
DIPP defines the definition of e-commerce:
Being a relatively new entity, there was a lack of clarity on what businesses actually constituted as e-commerce. The Department of Industrial Policy and Promotion (DIPP) has now come out with
clear guidelines defining what constitutes as e-commerce and how the Foreign Direct Investment rules would be applicable to the sector. Different companies have been adopting different models for online sales. Two of the commonly used models in e-commerce are the Inventory Based Model and Marketplace Model. But the problem was that, there was no clear definition of the marketplace model. The Department of Industrial Policy and Promotion has addressed this now.
Here is a look at both the models and how things will affect both the models post the new DIPP guidelines.
The Inventory Based Model:
An inventory based model is one where the e-commerce entity owns the goods and services it offers and sells them directly to the consumers. The relaxation of 100% FDI will not apply to any single brand retailers who adopted the inventory based e-commerce model.
All such single brand retailers need to procure at least 30% of the total goods they sell, from India within 5 years of the opening of their first store.
The Marketplace Model:
Marketplace model of e-commerce has now been defined by DIPP, as a company which offers an IT based platform on a digital or electronic medium, and acting as a facilitator between buyers
and sellers. Marketplace e-commerce companies would not be a direct seller and only act as a medium between Business To Business (B2B) or Business To Consumer (B2C) transaction between buyers and sellers.
All popular e-commerce companies like Flipkart, Amazon India, ebay India, PayTM, Snapdeal etc follow the marketplace model where they act as a platform connecting sellers and buyers.
Mr. Urvesh Goel,
Founder, SyberPlace.com
“Marketplaces are technology platforms, and were always open to 100% FDI. There is an inconsistency in how the law on multi-brand retail is being implemented. Companies which have more than 25% of their business between them are ‘group companies’, under law. Such marketplaces which have access to 100% FDI cannot be allowed to engage in multibrand retail through such ‘group companies’. One of the largest FDI funded marketplaces does more than 80% business with one multi-brand company. Another such marketplace has invested in a multi-brand
venture. It is difficult to believe that they will be biased to a seller in whom they are invested. The former marketplace has differential business policies supporting the business of this seller which contributes to their 80% business.”
Mr. Soumitra Gupta,
CEO & Founder, Togofogo
“This is a great move towards validation of marketplace and E commerce potential in India. I am sure in the next phase, we will see a similar move for retailers who own the products they sell mostly, like us”.
E-commerce and FDI guidelines:
As per the new DIPP guidelines, here is how much FDI is allowed for each online e-commerce sector.
Essential DIPP Guidelines For 100% FDI In Marketplace Model:
FDI LIMITS IN E-COMMERCE
Here is a look at some of the essential DIPP guidelines for all marketplace e-commerce companies to be eligible to do business in India.
- 100% FDI will only be allowed if the e-commerce company follows a marketplace model and not applicable for an inventory model.
- No e-commerce company can sell more than 25% of its total sales from one vendor including any of their group companies.
- Marketplace companies will not be allowed to influence pricing of goods and services sold and the pricing would be the onus of the respective sellers who sign up on these marketplaces.
Mr.Divyan Gupta,
CEO & Founder ,
Artanddecors.com “We welcome the clarity provided by the government. We feel that it is going to lead to better business practices, especially around more realistic product pricing as well as being more transparent and responsive towards sellers of all sizes on such marketplaces rather than being skewed towards their own sellers. Having said that, it would however be interesting to see how the government monitor discounting on the marketplaces. Failure to do so could erode the effectiveness of this move.”
Chirag Nangia,
Founder & Creative Head,
Thecrazyme.com:
“This move by the government is the recognition they have given to the e-commerce business model. While 100% FDI in e-commerce will definitely improve market outreach for small & medium e-suppliers, it will also impact consumer buying patterns and bring a paradigm shift in the e-commerce and start-up ecosystem. As a founder of an e-commerce start-up, I see this as an amazing opportunity to level up the playing field for e-commerce players. Overall, it will bring in a positive change in the entire retail industry”.
What the new rules mean for e-commerce websites?
E-commerce companies who have adopted a marketplace model can now hope to get funding from foreign investors after the DIPP guidelines allow them a 100% FDI route. Earlier major online companies like Flipkart and Snapdeal had been receiving foreign funding without any lack of clarity on the maximum limit or FDI permissible.
The 100% FDI rules in the sector also pave the way for new domestic and international companies to set up base in India for online retail, provided they adopt the marketplace model for doing online business in India.
With new DIPP guidelines, the government has now officially recognized marketplace model as a dedicated industry, which augers well for all e-commerce companies in the future.
Global bigwigs in the sector like Alibaba and Rakuten can now enter the Indian market with 100% owned subsidiaries increasing the overall investment in the sector.
What the new rules mean for buyers?
As a buyer, now you will not have to wonder about the big sales and discounts and make an immediate purchase not to miss the ongoing discount sale. As per the DIPP guidelines, marketplaces will not have any role to play in fixing the price of goods or services for sale anymore, neither would they be in a position to influence pricing.
All post sales issues will be resolved directly by the seller involved in your purchase and not the marketplace per se, making your purchase far more transparent.
With FDI allowed in the e-commerce sector, expect more companies to enter the market, offering you a higher number of options to make a purchase from.
What the new rules mean for sellers on multiple marketplaces?
As a small time seller, you can expect your sale numbers to go up, as DIPP has put a cap on maximum amount of sale from each vendor, including marketplace group companies. This means, all
sellers, including group companies like Cloudtail or WS Retail (group selling companies for Amazon India and Flipkart respectively) will now be able to sell only a maximum of 25% of the total sales, offering a level playing field to other small sellers listed on the marketplace. You will have a final say in offering the best suited price for your product without any interference from the marketplace to offer discounts.
Marketplaces can now enter into transactions with you as a registered seller on a B2B basis, leading to more balanced terms and conditions for both.
100% FDI in e-commerce and its impact for brick and mortar retail:
With pricing not in the hands of marketplaces anymore, brick and mortar stores are happy that the era of deep discounted prices, something which attracted bulk of customers to buy online is now a thing of the past.
Brick and mortar stores expect a more level playing field, although many experts believe that while brick and mortar stores cannot get FDI funding, unlike marketplaces, it is still unfair for small shopkeepers to compete with big marketplaces. Small time retailers are also worried that marketplaces may soon find loopholes to come up with a new strategy for increasing their sales, which will impact the livelihood of the small brick and mortar store retailers.
The gray areas and the road ahead for ecommerce:
While DIPP guidelines auger well for the future of the commerce sector offering a balance between online and offline retail while safeguarding the small sellers, there are many gray areas that need a dedicated focus by the government.
Warranty woes:
The problems for buyers are likely to continue as the warranty will now have to be provided by sellers and not marketplaces. Any buyer seeking warranty cannot approach the marketplace anymore, leaving him with no choice but to contact the seller and await a positive response.
No regulation check for seller grievances:
Sellers on marketplaces are not happy as most marketplaces have rules which are one sided. Fake purchases leading to non delivery and unethical returns due to long return policies are all charged by marketplaces, pinching the pocket of the sellers. There is no watchdog, which can resolve seller grievances and force the marketplaces to comply with some basic guidelines.
Impact on valuations to continue:
With discounts out of the window after new FDI regulations, the sales of marketplaces will get a hit, thereby further reducing the valuations of such marketplaces. For example, recently Morgan Stanley has marked down the value of its investment in marketplace major Flipkart by 27 per cent to $58.9 million. With slow sales due to lack of discounts the valuations of these firms may take further blow and take them to the brink.
The new norms will help increase foreign investment while protecting the rights of small sellers, buyers and brick and mortar store owners. DIPP guidelines are a good start, but the sector needs proactive approach and constitution of a watchdog to safeguard the rights of sellers and buyers.
Text: FWD Media Photos: Various Sources