Gaps in policy on e-commerce

In a major move to attract foreign investment in electronic commerce (e-commerce), India allowed 100 percent Foreign Direct Investment (FDI) in the marketplace format of e-commerce retailing under the automatic route. The marketplace model is a legitimate channel for doing e-commerce, one that genuinely promotes the interests of both the consumers and producers to save on the huge cost of holding inventory and stocks. Marketplaces mainly act as a conduit connecting sellers and buyers. In a sector  which has already witnessed over 10 billion dollars in investments and one on which the large swathe of people depend on their livelihood, the latest move has lent policy clarity and also how e-commerce would forge ahead by drawing the distinction between marketplace model and the inventory model. 

Policy analysts estimate that  5 billion dollars of foreign funds were raised by e-commerce companies last year with some of the principal players being Flipkart, Snapdeal, ShopClues, and Paytm - all funded by foreign investors. US e-commerce retail giant Amazon, the biggest rival for Flipkart, entered India as a fully-owned online marketplace player a couple of years ago, even as  Chinese major Alibaba is all set to test the domestic e-tailing waters before long. Online retail in the country had grown enormously within a short spell from one billion dollars in 2012 to 14 billion dollars in 2015, propelled by venture capital investors.  So far, India has allowed 100 percent FDI in business-to-business (B2B) e-commerce but not in retail e-commerce i.e., business-to-consumer or B2C. A report by realty consultant Knight Frank India Pvt. Ltd and the Retailers Association of India (RAI) reckons the share of e-commerce in retail is likely to jump from a mere two percent in 2014 to 11 percent in 2019 with a demographically dynamic youthful population increasingly using modern technology of mobile phone and the internet for shopping and purchase.

A press note issued by the Department of Industrial Policy and Promotion (DIPP) on March 29 said that a marketplace model is an information technology (IT) platform run by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.   But the DIPP has prohibited FDI in e-commerce companies that own inventories of goods and services and sell directly to consumers using online platforms. In allowing FDI in e-commerce, the authorities have laid down three provisos on the marketplace platform:  one, it cannot offer discounts, thereby setting at rest the predatory pricing practice by online companies that put at a disadvantage brick-and-mortar l retail shops in the traditional unorganized segment; second, one vendor’s share of the volume of trade on the marketplace cannot exceed 25 percent so that no monopoly emerges to influence product prices to the detriment of other producers/sellers; and third, post-sales delivery and customer satisfaction would be the responsibility of the seller and not that of the e-commerce entity. This effectively puts the onus on small sellers or retailers to take responsibility for quality goods and after-sales service or support for the product sold. The new policy mandates such e-commerce companies to display contact details of the sellers online so that the consumers are not taken for a ride in the event of defective goods or the products sold develop glitches.

Interestingly, even as FDI has not been permitted in an inventory-based model of e-commerce, the government extended the definition of the marketplace to include support services to sellers with respect to warehousing, logistics, order fulfillment, call center, payment collection and other services. Enabling the marketplace operator to provide such value-added services would go a long way in improving customer experience and market outreach for small and medium-size suppliers, analysts confidently contend.

The pre-budget economic survey said the e-commerce market in India was likely to reach 16 billion dollars in 2015 on the back of burgeoning internet population and heightened online shoppers who see comfort and convenience in such transactions without the woes of wasting time and energy. With estimates indicating that companies are gearing to spend between one billion and two billion dollars on e-commerce related infrastructure, the 100 percent FDI nod has not come a moment too soon to rid the country of its myriad roadblocks to free domestic trade for the lasting benefit of the consumers.

However, policy analysts while noting that the entry of FDI 100 percent into domestic e-commerce segment has brought clarity, its restrictive characteristics disallowing marketplace from offering discounts to customers and capping sales from a single vendor to a maximum of 25 percent would only make existing players get round to foil the new norms through some ingenious methods. They say the new policy would cause discomfiture to retail majors in e-commerce such as Amazon India and Flipkart, both of whom have their own captive sellers—Cloudtail and W.S.Retail—which permit them to function as hybrid inventory model. 

The upshot is that as a consequence of the new policy restricting the way these in-house sellers function, these companies could morph themselves into multiple such sellers through holding companies.  Market analysts deprecate the government’s patently protectionist stand by slapping restrictions on e-commerce companies in its bid to safeguard offline retail or the vast and disparate mom and pop stores that constitute the vote bank of the BJP, literally and figuratively. Consumers who have the luxury of not traversing to the malls or the nearest retail stores to get their goods by ordering with a click of the mouse from their house would be worst hit as these companies have been debarred from offering discounts or dangle any bonus schemes to retain customer loyalty. Ultimately, it is the consumer who is supposed to be the king, is dismissed as a page of no consequence in the scheme of things by the government which has its own compulsions and obligations to keep its core constituency such as traders from being subject to competition by online e-tailing, critics wryly say.