Updated FDI Norms — Has the E-commerce sector taken a huge blow?

For almost two decades, the guideline on Foreign Direct Investment (FDI) in the e-Commerce sector has been short and simple, “FDI in Multi-brand B2C eCommerce isn’t allowed.” The law was clear on its expectation and result — it intended to pull in more foreign investment to fortify the digital framework of the nation, ultimately enabling and leveraging its most significant resource being population.

However, either yearning for returns, unawareness regarding the law, or amalgamation of both the factors paved the path to an influx of modern e-Commerce companies which through ground-breaking corporate rebuilding began dodging the law. The infringements were outright flagrant and were called out on several events.

Although the government through various policies tried to bring the violators in the right path, the transgression continued with unrestricted, however, minor restorative tweaking to fit in the bill. After a period of violation committed by the e-Commerce giants, the lawmakers via Press Note 2 (2018) ushered stringent regulations that put a conclusion to these dirty tricks as well as set up a due date for compliance.

So, what does the FDI rule means for the e-Commerce marketplace, the MSME community, and domestic players specifically?

FDI Toppled the e-Commerce

e-Commerce marketplaces like Amazon and Walmart-backed Flipkart have been churning hefty profits by luring customers with massive discounts and lucrative deals, at the cost of damaging the offline retail sector. This inequality in the industry stirred up questions regarding the integrity and partiality and triggered a move against the foreign-backed e-tailers like Amazon and Flipkart.

Most importantly, considering that the Indian market consists of both e-Commerce and unorganised retail sector, the move towards offering a level-playing field for brick-and-mortar retailers was called for. Fundamentally, the issue with the e-Commerce industry soared from the two existing models: Marketplace and Inventory.

In the marketplace model (which Flipkart and Amazon currently operates in), the government permitted 100 percent FDI in the business model, under the automatic route subject to compliance with certain conditions in the “marketplace model of e-commerce activities” The new rule also mandated that deep discounting and deals, a key element for luring customers, had to stop. The move also disqualifies e-Comm players from forcing vendors to have exclusive deals in their platform and enforces a cap of 25% on the inventory that a marketplace or its entity or group companies purchases from a vendor. Owing to which, the e-Commerce behemoths had to shut down its grocery wing, and voluntarily closed doing business with self-managed sellers like Cloudtail, Appario Retail, WS Retail, and more.  

MSMEs Rejoiced the Move

While the updated FDI norm will make marketplace operators like Amazon and Flipkart, and even SMEs operating on these marketplaces struggle in optimizing their strategies and operations; it will provide relief to offline retailers and other sellers. With the guidelines in place, the marketplace platforms are now liable to provide equal services to all its vendors.

This move will guarantee a level-playing field to all vendors to participate on the e-Commerce platform, especially the MSME vendors who don’t have access to appropriate infrastructure or are unable to manage the incurring expenses on marketing, logistics and more. The FDI guideline will bridge the gap, which was initially exploited by e-commerce marketplaces.

The fact that the Department for Promotion of Industry and Internal Trade issued Press note 2 as a clarification and not as a new regulation proves that the government wants to preserve the sanctity of the law, and provide a booster dose to the MSME community.