In a move that is expected to boost foreign investment in the e-commerce space, the government on Tuesday clarified its position on foreign investments in e-commerce and permitted 100 per cent FDI in the market place format of e-commerce retailing under the automatic route.
While FDI has not been permitted in inventory-based model of e-commerce, the government extended the definition of marketplace to include support services to sellers with respect to warehousing, logistics, order fulfillment, call centre, payment collection and other services.
Though the clarification comes in the absence of clear FDI guidelines on various online retail models, the online marketplaces in India have already seen large foreign investments by several global players (such as Amazon) and into homegrown players (such as Flipkart and Snapdeal) who are operating in the space.
“In order to provide clarity to the extant policy, guidelines for FDI on e-commerce sector have been formulated,” DIPP said.
As per the guidelines, while e-commerce means buying and selling of goods and services, including digital products over digital and electronic network, the marketplace model of e-commerce means providing of an IT platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.
DIPP further said that the inventory-based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to consumers directly.
Along with defining ‘e-commerce’, ‘inventory-based model’ and ‘market place model’, the government also introduced guidelines relating to deep discounting by the players and as to what percentage of sale can be affected through one vendor or group companies.
DIPP said that an e-commerce firm will not be permitted to sell more than 25 per cent of the sales affected through its market place from one vendor or their group companies. It also said that e-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.
While single vendor or group company for a couple of leading players in India account for around 35 per cent to 40 per cent of the sale, experts say that this will impact business of some players.
“There is an issue of concentration risk but the restriction will create some problem for existing players,” said Amarjeet Singh, partner – tax, KPMG in India.
Welcoming the move to allow FDI within the sector under automatic route, Kalpesh Maroo, Partner, BMR & Associates LLP said, “Some of the restrictive conditions prescribed under the guidelines could also pose significant challenges and would therefore need to be evaluated closely.”
Even as the guidelines allowed e-commerce marketplace to provide several support services to sellers, it said that such entities will not exercise ownership over the inventory. “Such an ownership over the inventory will render the business into inventory based model,” said DIPP.