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Clarification on the Foreign Direct investment in B2C Ecommerce

B2C(Business to Customer) is major area of interest for many of the investors and entrepreneurs as the same is directly affecting the retail sector of India as well as the end customers of the retail products. At present there are many major players in that segment like Amazon, Flipkart, Snapdeal etc who had made a visible upper hand over conventional brick and mortar model of retail business by offering big discounts and other unmatched offers. Due to that there was huge hue and cry from the apostles of brick and mortar model of retail business to create a level playing field by bringing restrictions on the foreign funding to those companies as there is no clarity in the utlisation of the funds and the activities of those companies. Based on that and to boost the manufacturing segment of India under the Make In India initiative, the Government of India had clarified the norms on Foreign Direct investment in eCommerce entities and released a Press note to give immediate effect to its decisions.

Through the press note, the Government had made a definite effort to protect the conventional retail business model by clearly defining the eCommerce business models and putting certain restrictions on the activities of those entities which are in Business to Customer (B2C) business model. Though the offering of unseasonable discounts and other similar unfair trade practices are within the purview of the Competition commission of India, the Government had tried to curtail the flow of huge foreign funds to Indian retail market under the veil of eCommerce by defining the terminologies and dictating the terms and conditions.

A manufacturer is permitted to accept FDI to set up an eCommerce platform to sell their own products which are manufactured in India. That means a third party cannot act as intermediary in this case and the intention is to create a direct link between an indigenous manufacturer and end customer. This is also boost the manufacturing segment of India as the manufacturer can accept the foreign direct investment to set up an eCommerce platform to sell their own products under 100% automatic route. There is no specific mention or restriction about the nature of the entity in which the FDI can be accepted and hence another entity can be formed which is seperate from the manufacturing entity to function as the eCommerce platform. This will help the Indian Manufacturer to sell their products through the newly formed entity without diluting their interest in the core business entity.

At present 100% FDI is permitted in Single Brand Retail Trading and such entities are now permitted to accept FDI for setting up E commerce platform for selling their products. As mentioned earlier the eCommerce platform can be set up independent from the core business entity as the Press note is silent about that aspect. It is also clarified by the department that 100% FDI in eCommerce under automatic route is permitted only in case of “Marketplace” model of eCommerce. Market place model of eCommerce means providing an information technology platform by an eCommerce entity on an digital & electronic network to act as facilitator between buyer and the seller. The policy had made it very clear that the FDI will not be permitted in the eCommerce entity, if the business model is an inventory based business model. Hence it is clear that a company in which FDI is permitted cannot own the inventory and sell that to its customers. The intention behind the policy is to restrict the activities of the eCommerce entities only to facilitating the sale and to act as a medium or channel between the buyer and the seller.

In order to curb the unfair trade practices such as offering of hefty discounts, the policy had put forwarded a restriction on sourcing of the products. As per that an eCommerce entity cannot source the products beyond 25% of their total turnover from a single vendor or their group concerns. But these restrictions can easily be circumvented by forming 3-4 entities of same nature and the same is a serious loophole in the policy. This can again be restricted by defining the promoters interest behind the vendors and putting restrictions using that definition,. Further to that the eCommerce entity cannot give discounts directly to the customers and they cannot directly or indirectly influence the sale price of the goods or services . Under the new policy the eCommerce entity may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centres, payment collection and other services. But the post sales, delivery of the goods to the end customer etc will be the responsibility of the Vendor.

This clarification will remove the ambiguity which is prevailing in the FDI in eCommerce sector and the thin line between the retail services and eCommerce activities is now clearly defined and demarcated. Though the customers will loose the benefits of attractive offers and discounts the new move will protect their interest as well as the interest of conventional retail business model. This initiative may improve the manufacturing sector of India as they can now directly reach the customers by avoiding intermediaries and that will benefit the customers in long run . These steps, saving the loopholes and hardship in proper implementations of the rules, are a good step to create level playing field in the retail segment and truly a welcome move.

Bijoy P Pulipra

Image Courtesy : Google Images

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