Markets on the Internet and Foreign Investment
Smrithi Punnoose April 4, 2016
The recent Press Note issued by the Department of Industrial Policy and Promotion on March 29, 2016 (“Press Note”) has contributed immensely to the hullabaloo surrounding the hot topic of foreign direct investment (“FDI”) in the e-commerce sector. There seems to be a great amount confusion on whether to applaud and give the Government a thumbs up for the changes effected by the Press Note or whether to ‘slow-clap’ and watch the Government continue to dole out piecemeal clarifications while silently waiting for the ‘big ticket changes’. This blog aims to add to that confusion clear the confusion after summarizing the changes brought about by the Press Note.
In an earlier post on this topic, Codhai had highlighted the need for clarity on a number of issues in the law pertaining to FDI in the e-commerce sector, beginning with the definition of the term ‘e-commerce’. The Press Note explicitly provides that the buying and selling of goods and services, including digital products, over networks of computers, television channels, and any other internet application used in an automated manner such as web pages, extranets, and mobiles would constitute ‘e-commerce’.
The Press Note goes on to clarify that an e-commerce activity wherein the inventory of goods and services is owned by the e-commerce entity and is sold to consumers directly would be termed as an inventory based e-commerce and that FDI is not permitted in such a model. While this prohibition is not a new revelation, the Government has made it amply clear that the B2C e-commerce sector is out of bounds for foreign investors except in very specific situations such as (i) online sale of goods manufactured in India, (ii) online sale by a single brand retail trading entity with a ‘brick and mortar’ presence in India, and (iii) online sale of single brand products owned by an Indian manufacturer.
The Government’s bold move to acknowledge the existence of a marketplace business model and explicitly state that 100% FDI is permitted in e-commerce entities that run on such a model was long awaited and well appreciated. As per the Press Note, the activity of providing an information technology platform on a digital and electronic network which acts as a facilitator between buyers and sellers would qualify as a marketplace e-commerce activity. This definition provides much needed clarity and legitimizes the business model of larger player in the market like Snapdeal that have repeatedly claimed that they are acting within the letter of the law while accepting foreign funding.
Since there are no free lunches and all offers come with ‘T&Cs’ attached, the Government has not lost the opportunity to include a number of riders to the above welcome change. An e-commerce entity with a marketplace model has been permitted to provide support services to sellers on its platform in respect of warehousing, logistics, order fulfillment, running call centres, payment collection and enter into transactions with such sellers on a B2B basis. However at the
same time, all post sales services, warranty or guarantee services, delivery of purchased goods, and customer satisfaction has been stated to be responsibility of the seller (and not the platform). It has also been specified that such entities will not be permitted to exercise ownership over the inventory which is purported to be sold and any ownership over the inventory will render the business to be an inventory model, thus any FDI in such an entity would be a violation of the law. A number of e-commerce players in the market such as Myntra, Jabong, Zivame, and BigBasket have a significant inventory-led business and this prohibition could prove to be a hindrance in the way they conduct their business.
Further, it has been clarified that a market place entity shall be prohibited from affecting sales from one vendor or its group companies beyond 25% of the total sales affected through its platform. Thus, companies like Flipkart and Amazon which earn a major part of their revenue from W.S. Retail and Cloudtail, respectively, may have to rework their structures and downsize the dominance of individual sellers on their platforms. Marketplace players will also have to display the names and details of the sellers prominently alongside products, which a lot of companies including Myntra and Jabong don’t strictly comply with currently.
Another blow to the marketplace model comes with the Press Note’s prohibition of platform owners from directly or indirectly influencing the sale price of goods or services on their platform. While all the major e-commerce players have offered heavy discounts and more often than not even indulged in predatory pricing, these strategies may have to be curbed with the introduction of this specific condition.
While the Government has definitely earned a +10 for clarifying the definition of key terms pertaining to the e-commerce sector and finally conceding to the existence of a marketplace business model, the ‘n’ number of qualifications and riders to the 100% FDI permission does not paint a completely pretty picture of this sector. Though we may not be able to expect game changing liberalizations such as FDI in an inventory based model in the near future, for the time being the industry shall have to be content that the Government is indeed slowly, but definitely, addressing stakeholders’ concerns and the investor community shall be watching the events unfold with bated breath.
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