When the government expects the foreign companies to do almost everything that a retailer do, how can the former deny the latter the right to sell

The government is considering allowing foreign direct investment (FDI) in inventory-based models of e-commerce, subject to the rider that these will be solely aimed at export markets. A comprehensive policy on FDI in e-commerce has been under deliberation since 2018. In fact, during discussions with representatives of e-commerce firms and a domestic traders’ body viz. Confederation of All India Traders (CAIT) held on August 2, 2023, the Department for Promotion of Industry and Internal Trade (DPIIT) in the Ministry of Commerce and Industry made a presentation on the ‘fundamentals’ of the proposed e-commerce policy.

Against this backdrop, it is anomalous to deal with the subject matter in bits and pieces by carving out a special dispensation for e-commerce firms catering only to export markets. Even if the government was keen for such a carve-out, this ought to be done as an integral part of a ‘holistic’ package for e-commerce.      

E-commerce is the process of selling goods and services over the Internet. In early 2016, the government allowed 100 per cent FDI under the so-called marketplace model. The marketplace is a platform where vendors sell their products to consumers even as its owner merely acts as a facilitator by providing services such as booking orders, raising invoices, arranging delivery, etc. She can’t hold inventory or undertake direct selling.

The policy intent was abundantly clear. The foreign investor in the marketplace wasn’t supposed to invest in the inventory model. However, there were some exceptions. A foreign manufacturer is permitted to sell its products manufactured in India through e-commerce retail. Another way FDI can flow into e-commerce retail business is through single brand retail (SBR) trading entities operating brick-and-mortar stores

(for instance, Swedish furniture retailer IKEA) - as opposed to multi-brand retail (MBR) or simply ‘retail’ as it is understood in common parlance. Despite the policy intent requiring a clear demarcation between the two models one (read: marketplace) in which FDI was allowed and the other direct selling where it wasn’t, a clever bureaucrat in DPIIT obliterated it while drafting the fine print of the policy document. The Press Note 3 (2016 series) prescribed two conditions. First, the foreign entity owning marketplace cannot permit more than 25 per cent of total sales on the marketplace from one vendor or its group companies. Two, it cannot directly or indirectly influence the sale price.

In the absence of specifying who that vendor should be, it made way for a company linked to the owner of the marketplace to get in. The latter could set up four companies (call them subsidiaries or JVs) and control 25 per cent each of total sales on the platform. Contrary to the policy intent, which prohibited foreign investors in inventory models or direct selling, the fine print did just the opposite. Having allowed its entities to control almost all of the sales made on the marketplace, the second condition that the latter can’t directly or indirectly influence the sale price is laughable.

The micro, small and medium enterprises (MSMEs) who were impacted the most by this backdoor entry of e-commerce giants Amazon, Walmart/Flipkart etc in direct selling complained to the government. In response, on December 26, 2018, the DPIIT clarified that “the owner of the marketplace or its subsidiary or its joint venture (JV) with an Indian company can’t have ownership of the seller.” Further, “a seller on the platform can’t source more than 25 per cent of its inventory from a firm connected with the latter.”

Foreign investors can circumvent the first rider by having less than 50 per cent shareholding in the seller firm and arguing that they have no control (majority) over the latter. The marketplace owner can also sell his ‘own’ product – albeit through its wholesale arm – on the platform. All that the wholesale arm needs to ensure is to restrict supplies to the seller within the 25 per cent threshold.

It isn’t just a case of boundaries getting blurred. The official notes recognize and give legitimacy to the connection between the marketplace owner and the seller. These don’t prohibit foreign firms from keeping inventory and engaging in direct selling to consumers. They are doing it at the cost of millions of small traders. For instance, only three dozen firms out of the 400,000 sellers on the Amazon platform account for 67 per cent of sales on it.

Meanwhile, in 2020/2021, the Department of Consumer Affairs (DCA), in the Ministry of Consumer Affairs, Food and Public Distribution, issued the Consumer Protection (e-commerce) Rules, under Section 101 of the Consumer Protection Act, 2019. The rules bar affiliated entities from selling on e-commerce platforms; restrict business-to-business sales in e-commerce; restrict ‘flash sales’; prevent ‘abuse of dominant position’ by e-commerce firms and disallow sellers from using the name or brand associated with the marketplace e-commerce entities for the promotion of goods. When seen in juxtaposition with Press Note 3 (2016 series), all this is nothing more than plain rhetoric. Moreover, in the absence of a regulatory authority (this hasn’t even been proposed in the draft e-commerce policy) and institutional mechanisms to track the actions of foreign firms, it isn’t possible to ensure compliance with the rules.

Now, mandarins in the commerce ministry want to exempt bigger e-commerce players like Amazon from a rule that ‘prohibits the marketplace owner from holding inventory’ in case the product is meant for the export market. This is amusing as this rule was never put into practice even when it comes to domestic retail sales, courtesy of clever drafting by the bureaucrats.    

To enable these players to avail of the exemption, they are thinking of riders such as requiring them to keep the inventory for exports separate from their other operations and a mechanism like a custom bonded warehouse strictly separated from the domestic tariff area (DTA) and markets. The intent is that the product is meant for export once it enters the bonded space, it can’t re-enter the DTA.

The big question is: who will enforce the labyrinth of rules? At a fundamental level, what is the need for carving out a niche for marketplace owners in the field of exports? The ministry argues: that this will enable domestic producers including farmers, small artisans, and product owners to access the global markets. This argument is untenable. First, the MNCs are here to avail of the ever-expanding opportunities in the Indian market and our policymakers have so far helped them by suitably crafting the rules. Second, the former hasn’t helped MSMEs sell in the domestic market. How can they be expected to help in exporting? The government should drop the proposal of roping in foreign e-commerce players to boost exports. Instead, it needs to focus on addressing the present mess.

The idea of a marketplace is flawed. When, the government expects the foreign company to do almost everything that a retailer does viz. booking orders, raising invoices, arranging delivery, accepting rejection and so on, how can the former deny the latter the right to sell? The way forward is to shun this idea; instead, allow 100 per cent FDI in retail. Bureaucrats had already done it but in a ‘subtle’ way. The government should make it obvious and straightforward. Moreover, 100 per cent FDI should be permitted to all retailers, online or offline, big or small for a level playing field.

(The writer is a policy analyst, views are personal)