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100% FDI in online retail: What does it mean for you and the retailers

The guidelines will ensure a level playing field between e-commerce companies and brick and mortar retailers, but at the same time it take away the fun from online shopping


Shishir Asthana  |  Mumbai 

100% FDI in online retail: What does it mean for you and the retailers

Bringing in some clarity to the rapidly growing space, the government has finally allowed 100 per cent foreign direct investment (FDI) in the sector. In doing so, a number of rules and definitions have been clarified. Some of these rules have the potential of changing the way business is done, but it’s the clarity that the sector has got from the guidelines that are the key highlights of the announcement.

First, FDI has been permitted only in companies following the marketplace model and not the inventory based model. Marketplace model are for platforms that enable a large, fragmented base of buyers and sellers to discover price and transact with one another in an environment that is efficient, transparent and trusted. It’s like an open market with the website being a marketplace.

On the other hand, an inventory based model is where the company owning the website holds inventory of the goods it sells. It has the power of determining the price at which it will be selling the product.

By allowing 100% FDI in marketplace, the government is clearly indicating that the companies should only be conduits and play the role of facilitators. The guideline says that warranties and after-sales service will be provided by sellers and not the marketplace companies. Marketplaces can, however, provide support services to sellers such as logistics, warehousing, order fulfilment, call centres, payment collection and other services. They can also engage in transactions with sellers registered on a B2B basis.

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The problem is very few companies in India strictly follow either of the two models. It is generally a mix of both the models that is prevalent in the country. companies influence the price at which the goods have to be sold. But the press note issued by the government says "E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain level playing field." This clause will impact the way e-commerce companies work, especially during times of flash sales when massive discounts are offered and underwritten by these companies.

Some companies like Amazon give discount in the normal course of business by reimbursing the loss to sellers as ‘promotional funding’. These activities will now have to be curtailed. This move will be a big relief to the brick and mortar retailers who were the worst hit on account of predatory pricing. In short, the glory days of online shopping with deep discounts are behind us.

What then will be the differentiator between two sites, both from the consumer point of view as well as sellers’ point of view is something that smart brains behind these e-commerce companies will have to work out.

The second significant change that will impact the industry is in terms of restricting the supplier. The guideline says that no group company or seller on a marketplace can contribute more than 25% of the sales generated on the site. Many companies have created multiple layers of structures which are suppliers to the website. These companies, which are essentially held by the website promoters act as suppliers and at times are used to suck out profits.

Some are used to lure private equity investors thereby though the website or the front company with its padded cost structure will post losses, the sourcing company and its investors are sheltered to a large extent.

By restricting it to 25 per cent, companies will now have to allow a direct interphase of buyers and sellers. This would encourage transparent pricing in the industry. The move will be beneficial for the sellers as they will be able to get the complete benefit of pricing.

The guidelines will ensure a level playing field between e-commerce companies and brick and mortar retailers, but at the same time it take away the fun from online shopping. Nonetheless, the move, especially on transparent pricing will give a lifeline to these companies who were competing against each other for the race to the bottom by announcing ridiculous discounts. This however, will impact valuation of companies as sales will be hit without these flash sales that attracted a large section of buyers.

Though the policy is good, it also reeks of hypocrisy in government’s policy making. On the one hand the government as per their earlier stand is against FDI in multi-brand retail, it has allowed foreigners to have 100 per cent ownership in e-commerce. Multi-brand retail would have brought in more money for creation of malls, retail spaces, and warehouses among other things.

The Confederation of All India Traders (Cait) has rightly said that "FDI in ecommerce is nothing but a backdoor entry to global retailers which will facilitate them to sidestep restrictions in multi-brand retail since e-commerce has no geographical restrictions." Sky would not have fallen if the government would have cleared FDI in multi-brand retail too, if anything else it would have showed its maturity when it comes to economic policy.

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First Published: Wed, March 30 2016. 13:07 IST