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FDI in E-Commerce: A Case of Running with the Hare and Hunting with the Hounds?

By: Sharanya Ranga

The much-anticipated policy announcement of the Government of India clarifying FDI in E-commerce through Press Note 3 of 2016 on 29th March 2016 is finally out. “E-commerce” enters the regulatory framework with an inclusive definition to cover buying and selling of goods and services over a digital and electronic network. This effectively includes transactions effected over the entire gamut of computers, television channels and all other technology based applications. Defining the terms, “e-commerce”, “e-commerce entity” and the common business models of e-commerce, inventory based and marketplace based, is also a welcome step in setting out a clear regulatory framework for the sector.

While 100% FDI under the automatic route has been permitted in the marketplace model, it is subject to a host of new conditions. FDI in the inventory based business model has not been permitted. E-commerce marketplace entities are permitted to provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services. As a logical extension, such entities will not be able to exercise ownership over their inventory.

One of the most debated aspects has been the restriction on marketplace entities to “directly or indirectly influence” the sale price of goods and services and maintain a level playing field. This is a sweeping, all-encompassing statement that is prone to confusing interpretations and abuse. As the Government continues its march towards liberalisation by unshackling investment restrictions, such price control/restrictions, even with the supposed noble intention of creating a level playing field, literally takes us back to the socialist era. For whom is the level playing field? For online platforms providing deep discounts to win fickle customers, for offline (brick and mortar) businesses to rake up their sales or for the customers straddling online and offline mediums and getting a sweet deal? And how can the Government even bat for a level playing field for two different business models such as a Flipkart and a Big Bazaar?

Besides price restrictions, there is also a restriction on vendors, with one vendor (or its group companies) to not constitute more than 25% of the sales effected through the e-commerce marketplace. Maybe the Government’s goal was to weed out inventory-led models from functioning as marketplace models but this is just not well-thought out. The price and vendor restrictions may likely impact the structures and business models of marketplace entities and increase the cost of doing business besides giving way to more innovative (or complex) structures.

Shifting the onus of responsibility in a transaction entirely to the seller, all post-sales aspects such as delivery, warranty and guarantee of goods and customer satisfaction will be the responsibility of the seller. This may not drastically change the facts on the ground as B2B marketplace entities have traditionally eschewed liability towards the consumer by building in disclaimer clauses and limiting their liability to that of the platform. While marketplaces will continue to do their due diligence to mitigate reputational issues in the quest for building customer loyalty, in the tussle between regulators and the businesses, the customer is often left in the cold.

Globally, the digital revolution is demolishing traditional business models and throwing regulators in a tizzy with disruptive and innovative business models, that more often than not, function/thrive in a grey or a ‘no-laws’ land. The shared economy model is here to stay and the “one-size fits all” approach to e-commerce regulation by the Government completely misses the nuances of such unique models.  While the attempt to regulate such models is required to mitigate risk for investors, consumers and businesses alike, the government’s fine print on the do’s and don’ts for the marketplace model entities reeks of regulatory overreach.

The regulatory clarity on the marketplace based model of e-commerce sector is a huge positive for India, presently the world’s fastest growing e-commerce market, especially with foreign investors from the US and China betting big on India. That may well be the biggest impact in the immediate term, with newer players entering the market in India. Existing e-commerce entities, mostly funded by foreign venture capital will have to analyse their structures to stay compliant with the regulations as they ready themselves for their next fund raises.

Overall, the regulations fall well short of the Government’s self-proclaimed initiative to make it easy for businesses to grow and flourish in India. With the Government reaching its third year in power, a golden opportunity has been lost in bringing out a simple, predictable and transparent policy framework to fuel the growth of the e-commerce sector in India.


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