The Indian government recently allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called “marketplace model” through the automatic route, seeking to legitimize existing businesses of e-commerce companies operating in India. The government also notified new rules which could potentially end the discount wars, much to the disappointment of the consumers. This is because the rules now prohibit marketplaces from offering discounts and capping total sales originating from a group company or one vendor at 25%. The DIPP note also clearly states that an e-commerce entity will not own the inventory that is being sold on the platform.
The new policy also mandates such e-commerce companies to display contact details of the sellers online. The warranty or guarantee of products/services sold online will also be borne by the sellers, not the e-commerce company.
Importantly, the 'Information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller', is defined by the Market place model of e-commerce. Even the Indian Department of Industrial Policy and Promotion (DIPP) recently has said that e-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services.
According to Paresh Parekh, tax partner - retail & consumer products, EY, this is a landmark announcement and is likely to unleash further momentum in an already growing e commerce market. "I expect few more global e-commerce players now finalizing their India entry plans. There were a lot of concerns on FDI which have now been addressed. However, certain new conditions introduced regarding limit on single vendor sales through marketplace, etc could impact certain existing marketplace e-commerce models," said Parekh.
NASSCOM also welcoming DIPP's guidelines said this is a clear indication that the government identifies marketplaces as an electronic intermediary, operating a technology platform to facilitate sales and transactions between independent third-party sellers and buyers. Further adding to its statement it said that, it is extremely glad to see the reiteration of FDI policy 'as is' on the services sector, and also on sale of services through e-commerce.
At present, 100% FDI is permitted in B2B (business-to-business) transactions under the automatic route. The E-commerce firms as well as industry analysts believe that the norms would provide clarity to India's fast growing e-commerce industry. In an affidavit submitted before the Delhi high court on 21 December, 2015. DIPP said the current FDI policy neither permits FDI in B2C e-commerce nor recognizes the marketplace model in e-commerce followed by companies such as Flip kart, Snap deal and Amazon. Presently, the Global e-commerce giants such as Amazon and eBay are operating online marketplaces in India, while Indian players such as Flipkart and Snapdeal have foreign investments even as there were no clear FDI guidelines on various online retail models.
According to a market research report by property consultant Knight Frank India Pvt. Ltd and the Retailers Association of India (RAI), the share of e-commerce in retail is expected to soar from 2% in 2014 to 11% in 2019, while the share of physical, organized or modern retail is expected to shrink from 17% to 13%.