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FDI in e-marketplaces: Why some norms must be reviewed

01 April, 2016

“Mystification is simple; clarity is the hardest thing of all” — Julian Barnes

This quote perhaps sums up the reactions in the aftermath of the press note issued by the Department of Industrial Policy and Promotion to provide “clarity” on the foreign direct investment (FDI) policy for the e-commerce sector. 

FDI in retail in general and e-commerce in particular has been a matter of intense debate over the past few years. In this context, a specific policy permitting FDI in marketplace-based models in the e-commerce sector to begin with is a welcome move.  

The problem, however, lies in the fact that most industry players had in any case taken this view even before the guidelines were issued. Hence, to such players, the guidelines per se would only act as a conformation of the view already adopted.  

On the flip side, the riders accompanying the permission for FDI create significant concerns and uncertainties to their existing business models.  

While the guidelines are written out with an intent to provide clarity and should ideally cover existing players, the language of the guidelines seems to suggest that they would come into effect on an immediate basis thus creating some confusion on their applicability to existing marketplace-based e-commerce companies with FDI.  

One of the more problematic requirements is that the share of a vendor (or their group companies) in overall sales affected through a marketplace should not exceed 25 per cent. No clear provisions have been laid out as to the frequency at which this condition needs to be tested–whether on a yearly, monthly or daily basis–nor do the guidelines provide any leeway to existing players to reach this threshold requirement over a slightly longer periods of time.  

This acts as a major dampener to the marketplaces as preferred sellers would not be able to sell to intending buyers after reaching the 25 per cent threshold. It would also lead to difficulties in monitoring and implementing this condition in the absence of clear provisions. These conditions would also necessitate a tweaking in business models and structures of many existing market players.  

In a desire to create a protective environment for small retailers wanting a ‘level-playing field’, the regulations bar an e-commerce entity from influencing the sale price of goods or services. Without getting into the underlying intent of the condition, at the very least, in its present form, this condition is going to open up significant scope for litigation.  

Even taking the intent into account, the question that begs to be answered is whether foreign investment guidelines are truly the regulations equipped to deal with cases of unfair or predatory pricing and would the interests of businesses and consumers not be better served through alternative regulatory regimes such as competition laws? 

The more pertinent question is whether the said policy marks the end of the “discounts” era? The answer is perhaps not. In the short term, businesses will find ways of incentivizing customers. On a longer-term basis, a technology-based, asset-light model operating on economies of scale, with all other things being equal, ought to be delivering material cost savings. 

The regulations also provide that “sale” of services through e-commerce will be under automatic route. While this relaxation is a welcome move, a closer look at this guideline brings out some ambiguities. 

The principal point of confusion arises from the fact that many conditions related to the marketplace model are specifically applicable to the sale of products and services. So while it appears that an e-commerce firm engaging in the sale of services would be under the automatic route, a marketplace for services (for example, a website that lists out the service providers and connect the buyers directly to the service provider) would need to comply with the additional conditions (including on influencing prices). 

If this indeed were the case, classification of various service providers and aggregators (for cabs, food, and other services) in particular could throw up interesting issues! 

To sum up, while the clarity provided in the current guidelines is a step in the right direction, there is certainly a need for a relook at some of the restrictive conditions as well as a case for more guidance on a few areas. 

With inputs from Pooja Vijay Wargiya.

Kalpesh Maroo is partner at BMR & Associates LLP.


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FDI in e-marketplaces: Why some norms must be reviewed

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