The rise of e-commerce businesses has slumped the footfalls of offline stores, thanks to the ease of doing business that they offer as well as the increasing number of players in the field. However, if the recent government orders are anything to go by, this trend will soon witness a change.
In order to legitimize the existing businesses of the e-commerce companies operating in India, the government has allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called “marketplace model” through the automatic route. To end the discount disputes, it has also brought about new rules which can prove to be a source of disappointment to customers. These rules do not allow marketplaces to offer discounts and cap the total sales from a group company or one vendor at 25%.
There has been no FDI till date in retail e-commerce, or business-to-consumer, B2C. Some Indian e-commerce companies such as Flipkart and Snapdeal have been following the marketplace model already and raking in huge foreign investment. Marketplaces are a sort of a platform to bring the sellers and buyers to a common table.
The question now is whether e-commerce companies like Flipkart will have to stop giving discounts online? There have been allegations that e-commerce companies were already not following the norm by not following the existing policy norms. The model was under the scanner of authorities like the Enforcement Directorate. This turns out to be a very cautious step by the government in the wake of the huge inflow of FDI.
The department of industrial policy and promotion (DIPP) defined a marketplace model as an information technology platform run by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. However, FDI was not allowed in companies which do transactions through an online platform, basically companies that own inventories of the goods and services.
According to the new policy, it is mandatory for e-commerce companies to display full details of the sellers in the online platform. Thus, issues of warrantee and guarantee become the responsibility of the seller himself.
Promotional funding is an option adopted by companies like Amazon. Discounts are recommended to sellers on products by Amazon, but they are not forced to adopt these prices. However, since these discounts are financed by Amazon, sellers usually relent. Some sellers are the largest revenue earners for companies like Flipkart and Amazon. Though some e-commerce businesses are gradually shifting to the marketplace model, with the new regulations, this may see an acceleration in pace. Barring some old and giant sellers that earn revenue for these e-commerce companies, this new regulation may see these companies looking out for newer sellers.
E-commerce shares will up the ante by 2% in 2014 to 11% in 2019, while those of physical, organized or modern retail may see a shrink to 13%. The finance ministry has already been finding ways to levy a tax on e-commerce activities such as downloading songs, movies and books, online consumption of news, software downloads, and online sale of goods and services. Hence, these regulations come at a most transitive stage.
Representatives from two retail associations have moved the Delhi high court arguing that online retail companies have gained an undue advantage by being allowing access to FDI through which they are able to provide deep discounts that traditional retailers cannot match. They also feel that that the e-commerce companies are not allowed to sell directly to customers as per the current retail policy. However, they are doing just that in the name of following the marketplace model. This 100% FDI move by the government has takers and critics in equal numbers. The way ahead remains to be seen.
Nikita Bhatia is the co-founder of VenturEasy, an online platform for Company registration, book-keeping, accounting, tax consultancy and legal compliances in India. A Chartered Accountant and company secretary by profession, she has wide experience in the fields of audit, accountancy, taxation and corporate governance.