India allows conditional foreign equity in e-commerce

Online shopping trends
India on Tuesday permitted conditional foreign equity in the retail e-commerce segment when the products sold are also manufactured in the country, as also for single-brand foreign entities with physical retail chains that want to go for online merchandise.

The move is expected to benefit not just foreign multi-brand retail entities like Amazon and e-Bay, but also single-brand overseas chains like Adidas, Ikea and Nike. Existing Indian players like Snapdeal, Myntra, BigBasket and Flipkart can also now opt for foreign equity tie-ups.

Currently, global e-commerce giants like Amazon and eBay are operating online marketplaces in India, while domestic players like Flipkart and Snapdeal have foreign investments.

The guidelines, issued under Press Note 3 of the Department of Industrial Policy and Promotion (DIPP), came after numerous submissions from stakeholders that the current policy had no clarity on the issue of foreign equity in e-commerce where the sales were made directly to customers.

“In order to provide clarity to the extant policy, guidelines for FDI on e-commerce sector have been formulated,” DIPP said.

It has also come out with the definition of categories like “e-commerce”, “inventory-based model” and “marketplace model”.

As per the current FDI policy, foreign capital of up to even 100 percent is allowed under the automatic route involving business-to-business e-commerce transactions. No such foreign equity was permitted in business-to-consumer e-commerce.

But now, a manufacturer is permitted to retail products made in the country through foreign-owned entities, even as single brand foreign retail chains that currently have brick and mortar stores can undertake direct sale to consumers through e-commerce.

As regards the Indian manufacturer, 70 percent of the value of products has to be made in-house, sourcing no more than 30 percent from other Indian manufacturers. But no inventory-based sale is allowed — that is, such foreign retailers cannot stock products.

For such sales, the e-commerce model will include all digital and electronic platforms such as networked computers, television channels, mobile phones and extranets. The payment for such a sale will be in conformity with the guidelines of the Reserve Bank of India.

The Boston Consulting Group has estimated that India’s retail market will touch $1 trillion by 2020 from $600 billion in 2015. Various other agencies have said that the e-retail component in that will reach $55 billion by 2018 from $14 billion now.

According to industry chamber Assocham, the e-commerce industry will be looking over the next 12 months to add to add around between 5-8 lakh people to the existing staff of around 3.5 lakh, thanks to the fast pace of growth in this segment.

“An explicit position from the government on where it stood with reference to e-commerce has been long overdue,” said Vivek Gupta, partner with BMR Advisors, adding this however has come after some $10 billion have been invested in the sector.

While the government had little room to state a policy position, it has, nevertheless, sought to keep some safeguards, he said.

Domestic e-tailers have alleged that foreign e-commerce companies are acting like a marketplace by storing goods in their warehouses.

Prior to this development, Commerce Minister Nirmala Sitharaman has met industry representatives from both e-commerce and retail companies as well as other stakeholders to discuss opening up the e-commerce sector to FDI.

The Retailers Association of India had moved the Delhi High Court last year seeking a level playing field between online and offline retailers, while the Confederation of All India Traders (CAIT) has urged the government not to turn the Indian retail market “into an e-commerce dumping yard by allowing FDI in e-commerce”.

Reacting to Tuesday’s measure, CAIT said: “Allowing 100 percent FDI in e-commerce today (Tuesday) by the union government has made the government a U-Turn government known for taking U-turn on several policies earlier opposed by the ruling party.

“It is deeply regretted that party which was shouting at full throat for opposing FDI in retail is now advocating FDI on one pretext or the other having scant respect for the trading community.

“It is an irony that Prime Minister Narendra Modi is time and again advocating empowerment of small businesses, whereas, on the other hand, regular steps are being taken to disarm the traders from their business activities,” it added.