FDI in e-commerce: no more fifty shades of grey

At an impromptu fun-filled riddle competition among friends, family and single malts sometime ago, I was asked “What have you read recently that is supposedly hot yet cold, very explicit yet leaves something to the imagination?” The correct answer was Fifty Shades of Grey by E L James, but I got it completely wrong. I had answered: The Press Note on FDI Regulations in E-commerce in India, leaving everyone in the room totally flummoxed with my response.

The DIPP (Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India) eliminated some of these conundrums through their just-issued Press Note No. 3, 2016 Series (PN3) on Guidelines for Foreign Direct Investment (FDI) in e-commerce.

Actually, there have been no new announcements as such, and the existing laws have just been re-stated more clearly. Where the PN3 scores is in clearly defining marketplaces and inventory based e-commerce models. Now it is more clear, as it was always my view that marketplaces merely provide a technology platform connecting buyers and sellers. That the law now allows them to offer services like logistics and customer support, and also collect payments on behalf of sellers is a good step.

FDI in B2C e-commerce in India has always been prohibited by law, yet this has never proved a deterrent for e-commerce companies who have blatantly broken the FDI laws and raised billions of dollars from overseas funds. On several occasions, the Enforcement Directorate (ED) has apparently investigated many e-commerce companies for breaking these laws, yet we have not heard of any further action being taken even though it was obvious to all that the regulations were being broken with impunity. This gets licked now thanks to PN3. Hopefully.

Also Read: 100% FDI in online marketplaces: a masterstroke or a new legal quagmire?

By limiting the business of any single vendor, seller, or group entity on the marketplace platforms to less than 25 per cent, the PN3 strikes a blow against the current clever company structures employed by e-commerce companies that carry inventory but pretend to be a marketplace. No more nudge-nudge-wink-wink-front-end-back-end-top-end-bottom-end-right-end-left-end-arms-length-yet-tight-embrace-multiple-entities. To me, this is the biggest point in PN3 because it finally clarifies what everyone always knew - that FDI laws were being cleverly circumvented through structural smoke and mirrors.

Industry experts have suggested in the media that thanks to PN3, two things will now happen; deep discounting and predatory pricing will stop and marketplaces will now be forced to expand their seller base. I do not agree with both views. Here’s why:

Deep discounting happened because e-commerce sites, armed with cheap and easy money and with no differentiation strategy, used predatory pricing to acquire customers over the years. Sure, this practice may stop now, not because of PN3, but because the music is slowing down and the funding party is beginning to end. Consider this: If the top ten marquee investors who have driven e-commerce valuations in India to insane heights so far come together today after reading PN3 and promise to invest another $ 5 billion in Indian e-commerce companies, do you think deep discounting will end? If so, well, please think again.

Marketplaces will definitely expand their seller base as they have always done. This is to offer customers increasing choice and selection and also de-risk their business by spreading it among more sellers. PN3 will play no role in this. It is like saying Uber will add more drivers to their platform, not because it offers riders lower wait times, but because the law allows people to drive!

Here’s how I think things may pan out:

1. Global marketplaces like Alibaba and Rakuten will plan fresh moves to enter India directly with 100 per cent-owned subsidiaries (especially in the case of Alibaba, whose current e-commerce investments in India are not shaping up well enough), although frankly the earlier law never prevented this. Ebay (through their subsidiary) has been around with a marketplace model for years now while fully conforming to the existing FDI laws in India.
2. The likes of Alibaba may also evaluate investments into e-commerce ventures of (say) the Tata Group as has been rumoured in the media.
3. Amazon will have to wait for some more time before they can launch their preferred inventory-based model in India. Meanwhile, they have a bigger challenge to face now.
4. Single-brand retailers like M&S, H&M, Ikea, and Puma will launch e-commerce sites along with their offline stores. This will be great for customer experience.
5. There’s talk that PN3 will allow backdoor entry to global multinationals like Walmart. This is unlikely to happen. Walmart will enter India based on the FDI laws for offline retail and not because of B2C e-commerce laws. They may continue to work on B2B e-commerce in India. Incidentally, FDI in B2B e-commerce has always been allowed.

So, who really gets impacted?

Actually, any e-commerce company that has raised overseas funds is impacted. Since the law has not changed (except in defining marketplaces) in any manner, many of them may face the prospect of being investigated if they have fallen foul of FDI regulations earlier (I suspect the short answer is yes). Biggies like Amazon, Flipkart, and Myntra, which follow an inventory-led model or pretend to be a marketplace by routing large parts (well over 25 per cent) of their sales through friendly back-end companies like WS Retail and Cloudtail may have a huge issue on this count. I am surprised that this was such a long time coming since the law has been flouted for years now.

Here’s something else to chew on. The PN3 defines e-commerce as the buying and selling of goods and services including digital products over digital and electronic network. Now consider this. What about (say) Cleartrip, Yatra and other OTAs? They are marketplaces selling air tickets delivered digitally from just a handful of airlines who are sellers. At least one of these airlines may be delivering 25 per cent of tickets by value to consumers. Some of these OTAs have raised FDI. And what about bookmyshow.com, which delivers movie tickets digitally and has also raised funds from outside India?

Hmmm. Interesting. Follow this space for more developments.

Having said all of this, my view on FDI in e-commerce is quite different and as follows:

1. There is no need for a separate FDI in e-commerce policy. E-commerce is another medium of retail and should be clubbed with the overall ‘FDI in Retail’ policy.
2. FDI in retail has always been viewed politically in India by successive governments. It should be viewed and decided economically.
3. The top two concerns against allowing 100% FDI in retail are security and protection of small traders. We allow FDI in Defence and Railways, surely retail can be allowed from a security perspective. Further, our traders and mom-and-pop shops are very enterprising. No large retailer can knock them off easily.
4. India will gain significantly through advanced logistics technologies large retailers will bring; local manufacturers will find more avenues to sell their produce and consumer prices will go down with the entry of multi-national retailers.
5. Keeping this in mind, India should simply allow 100% FDI in all retail including e-commerce. This is a reform crying out for years now.

Meanwhile, next time anyone asks me a riddle about my reading habits, I shall be better prepared.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory)