Foreign Direct Investment in E-Commerce, India
Being home of more than 1.3 billion population and consumption-led economy India is currently a very attractive destination for foreign investment in the e-commerce sector. Earlier India was not opened to foreign investments because of the interests of local and offline traders. It was in 2016 only when the foreign direct investment was allowed in the e-commerce sector.
According to press note 3, 2016 a clear distinction was made between the marketplace and inventory model of e-commerce to attract foreign investments and as well as to protect the interest of small and medium business owners, mom and pop shops and offline traders. The marketplace model is where e-commerce firms work as an online facilitator between buyers and sellers. They provide the online or digital platform where customers and sellers interact. In this model, these facilitators are not allowed to influence directly or indirectly the prices of the goods and services. This arrangement has been done to provide a level playing field for all vendors registered under these online platforms. For example, Amazon India and Flipkart work as an online marketplace for sellers and buyers. 100% foreign direct investment was allowed in marketplace model through automatic route.
For the development of level playing ecosystem, a seller or vendor cannot have more than 25% of total sells on a particular marketplace. This restriction was made to avoid manipulation of prices. In the case of the inventory model, no FDI is allowed. For example, Chinese e-commerce entity Alibaba falls under inventory type of model. If a firm maintains its own stock of goods then this firm will be considered under the inventory model. Under marketplace model, no e-commerce firm can maintain stock or inventory.
Currently, India is receiving massive FDI from foreign countries. There have been many mergers and acquisitions for expanding and making a stronghold in the sector. The large inflow of FDI money disrupted the offline business of traders through heavy discounts and offers. The small and medium e-commerce firms cannot compete against such large discounts and offers. There is a big divide between small and big giants when it comes to e-commerce market share. Majority of the e-commerce market in India is occupied by big giants Amazon and Flipkart while small and medium companies have very less market share. Further consolidation is being done by various strategic mergers and acquisitions. The latest being the multibillion-dollar acquisition of Flipkart by Walmart. Flipkart acquired Myntra in 2014 and Jabong in 2016.
There have been many complaints of violating the e-commerce policies against online portals. In this background, Government of India recently updated the FDI norms in the e-commerce sector to plug the loopholes in previous guidelines. The marketplace e-commerce entity like Flipkart and Amazon cannot exercise ownership over the inventory. Inventory of a vendor will be considered as controlled by the marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group of companies. Although this norm was there earlier, new updates made it very clearly. The marketplace which fails to comply this norm will be treated as inventory based model where there is no FDI allowed. This will end the monopoly of the few suppliers on these marketplaces.
An entity or e-commerce company having equity share from these marketplaces will not be able to sell goods and services on these portals. For example, Amazon has an equity share in Cloudtail and Appario. With coming of this norm Amazon will have to offload its shares in these selling firms.
The vendors on marketplaces will not be discriminated and will have equal access to services like quick delivery. The services should be provided in a fair and non-discriminatory manner to all vendors registered under these platforms. The cash-backs, discounts, and exclusive offers should be non-discriminatory.
The new changes will come in effect by February 1, 2019, but it will negatively hit big giants like Amazon and Flipkart e-commerce companies. The Wallmart will not be able to sell products on Flipkart. The quick delivery services like Flipkart Plus and Amazon Prime will face the heat of these norms.
The short-term impact of these norms will be job cuts and slow growth of the sector. The consumers will not get the benefit of deep discounts and hence this will impact consumer behavior too. The foreign investment in the sector may slow down.
The brick and mortar traders will be happy with these new changes. The deep discounts had distorted the retail sector of India. Now the small and medium online and offline traders can compete with big giants. The small vendors on these marketplaces should be able to compete with big brothers. The malpractices and predatory pricing policies will be curbed.
The press notes3, 2016 had made it clear that prices of product or service could not be influenced but there had been many complaints against these online platforms. With these new norms, it is expected that a level playing field in the e-commerce sector will be established. The updates in FDI policy would hurt the big giants but they need to factor in the new changes in their plans for long-term sustained growth. Indian e-commerce is booming now and the internet user base is increasing day by day which will further help in the growth of the sector. If these policies are implemented in letter and spirit a robust ecosystem of online retail will be developed in India.