Indian government’s decision to allow 100% FDI in e-commerce through the automated route in 2016 was a breath of fresh air for a large number of startups in India. It was a welcome move as it enabled 20,000 retailers to find bigger and more sophisticated online platforms to sell their products. Since then the e-commerce industry has evolved and shown rapid growth.
In India, e-commerce is broadly divided between domestic and cross-border, B2B and B2C, marketplace and inventory based and single brand and multi-brand. Technology-based advancements like digital payments, hyper-local logistics,analytics-driven customer engagement and digital advertisements have helped the Indian e-commerce industry to grow at a faster rate. Initiatives by the Indian government such as Digital India, Skill India, Startup India and Make in India have also contributed to the growth of the industry. The Indian e-commerce market is expected to grow to US$200 billion by 2026.
India’s foreign direct investment (FDI) regulations allow 100% FDI in B2B e-commerce business (companies such as Walmart and Alibaba that operate a cash-and-carry business) and in B2C online retail of multi-brand goods and services under the marketplace model like Amazon, Flipkart, Snapdeal and in trading (including e-commerce) of food products manufactured or procured in India. The regulations allows single brand retail trading entities that fulfil the pre-condition of operating brick-and-mortar stores to undertake retail trading through e-commerce subject to local sourcing requirements. It does not allow any FDI in the B2C inventory-based model of e-commerce and in companies that engage in multi-brand retail trading by means of e-commerce.
The presence of international players like Amazon, eBay, Alibaba along with domestic operators like Snapdeal, Flipkart, TataCliq as well as inventory-led electronic retailers have made the Indian e-commerce sector highly competitive.
The US is among the top ten countries for cross-border shopping for Indian buyers. Some of the leading categories for cross border e-commerce include automotive, health and wellness, beauty products, toys, clothing, footwear, jewelry and digital entertainment and educational services. High shipping costs, import duties and difficulty in returns and exchanges are some of the factors that slow down the growth of cross-border e-commerce.
Many B2B companies have now started to develop their own platform for small business owners and traders. This move has been taken to exploit the huge potential in the B2B e-commerce market in India.
Transactions by cash have high administration costs for e-commerce companies, which reduces their margins but digital solutions are evolving fast to address these complexities. Debit card usage in India has increased by 86% in the last few years, according to media reports, which shows that people are getting more comfortable in using debit cards for online transactions. Digital payments will act as a game changer for the domestic e-commerce market and the heavy reliance on cash-on-delivery mode is likely to be reversed in the next five to 10 years. Mobile e-commerce is growing effectively and is expected to contribute up to 70% of total e-commerce revenues.
Current FDI norms
The government of India issued a press note in December 2018 introducing certain changes to the FDI policy in the e-commerce sector which became effective from February 2019. As per the press note, the e-commerce entity is not to exercise ownership or control over the inventory. For this, the inventory of a vendor will be deemed controlled by the e-commerce entity “if more than 25% of purchases of such vendor are from marketplace entity or its group companies”.
E-commerce entities cannot sell any product on its platform of any vendor in which it or its group companies has an equity stake. An e-commerce entity cannot require any seller to sell product exclusively to their platform only. However, it does not restrict the seller from willingly selling a product on just one platform. The press note also emphasizes that services provided to vendors’ should be at arms length and in a fair and non-discriminatory in manner.
These changes have prompted Amazon and Flipkart to remove several sellers from their platforms and have affected their revenue. However, analysts believe this is just a phase and that the sector’s growth is intact. The impact will be temporary. In fact, both Amazon and Flipkart are working out plans to hedge against the new rules.
Gautam Khurana is the managing partner of India Law Offices.
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