Ecommerce FDI to Hurt Consumers and Small Sellers

By allowing 100% FDI in the marketplace model, this government has addressed just one pain point in the retail industry. Arvind Singhal of retail consultancy Technopak points out that contrary to the euphoria among brick and mortar retailers over the government’s latest move, there is no level playing field being created by merely allowing 100% FDI in marketplace model of e-commerce. “The brick and mortar stores are still not permitted to get foreign investment. Besides, I would say the inventory lead model should be encouraged since it helps the government’s own Make-in-India drive. This model allows etailers to take inventory risks and source private labels from small manufacturers. Typically, the inventory lead e-commerce model is a faster road to profitability”.

Anyway, what the government has done through the press note last evening is merely reiterating a long-held view, it is unlikely to open floodgates of FDI for etailers in India. The big boys are already funded through FDI – in some cases by more than 50% – so there seems to be no dearth of foreign investors, pension funds or the likes who are investing in Indian e-commerce without a care about which model it actually follows. This move may, at best, stem the rising instance of e-commerce companies shifting their base overseas for easier access to funding.

Retail trade in India is categorised variously into heads such as single or multi brand, marketplace or inventory models, wholesale cash and carry or front end. Restrictions have been placed on FDI in most cases with only 51% being allowed in single brand retail and 100% FDI allowed now allowed in B2B e-commerce and marketplace B2C. It must be noted that foreign investors seem unconcerned with the model an Indian e-commerce company is following since several estimates put the amount of FDI the big guys have attracted in the last two years through their marketplace models at $5 billion.
An official at a large e-commerce company had said earlier that though the marketplace model probably does not exist in any other country in the world, it is beneficial in India since it helps small sellers expand their geographical reach and therefore nullifies fears of kirana owners getting impacted adversely by the arrival of foreign investment in the sector. His argument: FDI should in fact not be allowed in the inventory lead model of e-commerce (where the e-commerce company owns the inventory) since then large global retail brands can distort markets through pricing power.
The move to allow 100% FDI in the marketplace model comes just when the Delhi High Court is examining a PIL which alleges FEMA violations by e-commerce sites. A probe against 21 companies is already on, on a petition filed by the All India Footwear Manufacturers and Retailers Association which alleges violation of FD rule by e-commerce companies.

Instead of getting into the marketplace versus inventory lead models, the government should just open up retail trade to FDI. Period. Besides, stipulations in the press note like capping sales on an e-commerce platform by any one vendor or its group companies is also another pain point for the industry. Specifically, this will impact Flipkart and Amazon where in-house companies WS Retail Services and Cloudtail India may be generating more than 25% of each company’s sales respectively.

Another pain point is the stipulation that warranty is to be offered by the manufacturer, not the etailing platform. Of one buys a small kitchen appliance online but wants to return it or get it serviced under warranty, one now has to contact a small shop in the country’s hinterland to get this done instead of asking a Flipkart or an Amazon for help. Obviously, the press note issued yesterday is not designed to make life any easier, either for consumers or for small sellers.

In a Press Note in March, the Government announced the following:

  • 100% FDI under automatic route permitted in the “Marketplace Model of E-commerce”
  • Marketplace E-commerce entity may enter into transactions with its registered sellers on B2B basis
  • Marketplace E-commerce entity may provide Logistic, Warehousing , Order Fulfilment, Call centre, Payment collection and other services
  • More than 25% of the total sales should not be done by one vendor or its Group Companies
  • The Name, Address and Contact details of Seller should be clearly mentioned
  • The Seller shall be responsible for Post Sales, Warranty and Guarantee of goods sold by it
  • Marketplace E-commerce entity should not influence the Pricing of Goods sold on its Platform.
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