FDI in e-retail

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Bikky Khosla | 05 Apr, 2016
The Centre last week came out with new FDI guidelines in retail e-commerce. As per the new norms, 100 percent FDI under automatic route is permitted in the "marketplace model" of e-commerce; such entities are barred from influencing the pricing of goods sold on their platform; and they are no longer allowed to sell more than 25 percent of their total sales through any one vendor or their own group companies. Clearly, this move is aimed at removing ambiguity and bringing in a badly needed clarity, but at the same time it does raise a bigger question -- how can this latest move benefit or hurt the sector?

The new guidelines come with clarified definitions of 'e-commerce', 'inventory-based model' and 'marketplace model' and thus leave no room for ambiguity. Until recently, there was no such clear definitions and a few firms were allegedly working around this ambiguity, often inviting legal challenges. The clarity will also pave way for new foreign investors and global e-commerce firms who have not yet entered the India market. As a result, more investments will come, more jobs will be created and additionally as the newcomers will come with their own sets of requirements, several other sectors such as warehousing, logistics and packaging and realty are likely to get a booster shot.

It is said that predatory pricing by e-platforms will come to an end now. The government claims that this will help create a level playing field between online and offline retailers while some critics express concern that rise in prices may make the e-commerce marketplace unattractive to customers. I think both these views are a little over simplified, because brick and mortar retailers are still not permitted to get FDI and e-commerce platforms will still be able to ride on factors such as the convenience they offer. In addition, the move may prove a blessing in disguise for those firms which were allegedly involved in predatory pricing, leading to their profitability, as discounts are now to be absorbed by their vendor partners.

There are some concerns, however. The new guidelines, for example, direct that the sellers -- not the e-commerce platform -- shall be responsible for post sales, warranty and guarantee of goods sold by it. This may affect customer confidence in a big way. Also, what will happen to those FDI backed firms which were -- before announcement of the new guidelines -- operating a inventory-led model or a mixed model of inventory and marketplace. Should they be asked to shut shop? Can we afford to ignore the inventory lead model at a time when we are prioritising the Make-in-India drive? It seems the policy still needs much refinement, though as the first step it is long overdue and a welcome move.

I invite your opinions.