Indian government allows 100 percent foreign investment in ecommerce sector

In a big boost to the online retail business, the Indian government has announced permitting 100 percent foreign direct investment (FDI) under the automatic route for retail trading in the marketplace model of the ecommerce sector. However, this is not applicable to inventory-based model of ecommerce.

The new policy was issued by the Department of Industrial Policy and Promotion of the Indian Ministry for Commerce and Industry in a notification two days ago and comes in the wake of persistent requests from ecommerce majors such as Flipkart and Snapdeal to allow 100 percent FDI in the growing industry.

According to the notification, the ecommerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection, and other services. However, such entities will not exercise ownership over the inventory.

"Such an ownership over the inventory will render the business into inventory based model," the notification said, and added that the ecommerce firms will not be permitted to sell more than 25 percent of total sales from one vendor or its group companies.

The notification also described the marketplace model of ecommerce as an "information technology platform by an ecommerce entity on a digital and electronic network to act as a facilitator between buyer and seller".

The move did not go down well with the Confederation of All India Traders (CAIT), the apex body representing the country's trading community at national level, which has decided to chalk out an action plan on the issue at a meeting to be held in Delhi next week.

The confederation fears that the new policy would adversely impact the retail industry, whose annual turnover is said to be around $30 billion (2 lakh crore rupees) and expected to grow 10 times by 2020.

Speaking to ZDNet, CAIT national president B C Bhartia felt that the government ought to have released a white paper before taking such a policy decision and accused the government of ignoring the interests of the domestic retail sector. "Unemployment is the biggest problem in the country and the majority of the self-employed depend on the retail trade. But such decisions are bound to impact the livelihoods of these people," Bhartia said.

He wanted to know if the government did any study to assess the impact on domestic retail trade in the years to come and also how much investments would come into India. "We have submitted many representations to the governments, present and past, against allowing FDI in the retail sector but our pleas were never considered," Bhartia said, and added that the traders from all over the country will meet from April 4 to 6 in Delhi to decide the future course of action.

However, the National Association of Software and Services Companies (NASSCOM) and startups have welcomed the decision. NASSCOM said that the government has identified marketplaces as an electronic intermediary, operating a technology platform to facilitate sales and transactions between independent third-party sellers and buyers.

"However, restricting sales of a vendor to only 25 percent of the sales in the marketplace may prove to be restrictive, more so if the vendor sells high value items. The industry might face difficulties in case of sale of electronic items, where a vendor may be offering exclusive access to certain items or discounts. Marketplaces have no control on how a product is priced and only organise sales where vendors participate," it said in a statement.

"This offers consumers with a variety of choices and also attractive prices, we hope that such consumer-friendly practices similar to 'sales' being offered by retailers will not be restricted. We firmly believe that these guidelines will strengthen ecommerce's growth in the country and iron out issues that have been hampering the industry in the past," said NASSCOM.

Welcoming the government decision, Snapdeal chief executive Kunal Bahl tweeted: "Great to see the guidelines around 100% FDI in ecomm marketplaces. Glad the govt recognises and supports an industry transforming India!"

Aditya Kandoi, co-founder of the startup CareOnGo, which facilitates people to buy medicines on its platform through local pharmacies across India, said that foreign investment was a key component driving Prime Minister Narendra Modi's "Make in India" campaign.

"By allowing 100 percent FDI in ecommerce marketplace, the government has helped lift the long-perceived bureaucratic mind block around the segment. It will give the necessary push to the spirit of startup culture in general. Furthermore, the 25 percent cap on total sales and well formulated policies will help pave a level-playing field and curb predatory pricing," he said.