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100% FDI in e-Commerce Retail
Apr 08, 2016

Almost 10 years after e-commerce started in a big way, the Union Government allowed 100 per cent foreign direct investment (FDI) in e-commerce marketplaces. Though it has been introduced with a few riders, the reform comes just ahead of Chinese major Alibaba's proposed entry into the country. It also coincides with a recent markdown of valuation of e-commerce companies.

  • Some of the prominent e-commerce marketplace players in India are Flipkart, Snapdeal, ShopClues and Paytm—all funded by foreign investors.

  • American major Amazon, too, entered India as a fully-owned online marketplace player two years ago.

  • The sector has got an estimated $10 billion (Rs 65,000 crore) of foreign investment since it began in a big way 10 years ago.

  • In 2015, around $5 billion (Rs 32,500 crore) of foreign funds were raised by e-commerce companies.

  • Even now, no FDI is allowed in inventory-led online businesses that companies such as Amazon have in the US.

  • Till now, policy guidelines had stated that no FDI was permitted in e-commerce.

  • The government's move will bring in greater foreign investment into a sector that is set to grow from $16 billion to $70 billion by 2020 (excluding travel).

  • International players as well as Indian entrepreneurs have exploited the grey area in the policy till now, thereby running online operations with dollar funds from marquee investors.

  • Online marketplace platforms, where companies such as Amazon India, Flipkart, Snapdeal and many others hosted thousands of sellers, were described as technology enablers rather than e-retailers.

  • They claimed to have no inventory of their own. That kept them going even with a ban on FDI in e-commerce.

  • The government has now put an official stamp on how the e-commerce majors have for many years operated their business.

Some Conditions: While liberalising e-commerce, the Department of Industrial Policy & Promotion (DIPP) has introduced conditions to ensure that platform owners do not turn sellers. Some of the conditions are that sales cannot exceed 25 per cent for any vendor, marketplace players or their group companies cannot sell, guarantee and warranty must be the sole responsibilities of the sellers, and platform owners cannot influence pricing of products so that there's a level-playing field.

  • DIPP has clarified that 100 per cent FDI is only for the marketplace format of e-commerce, where the company provides a platform to act as a facilitator between buyers and sellers—and not for the inventory-led model. It has defined e-commerce as buying and selling of goods and services, including digital products over digital and electronic network.

  • The cap of 25 per cent on sales by a vendor on a marketplace will ensure a broad base of vendors for a true marketplace. This may require some of the operators to go on the drawing board to comply with the conditions.

  • This sector has attracted the maximum FDI in 2015. Enabling the marketplace operator to provide value add services like warehousing, delivery, payment processing will improve customer experience and market outreach for small and medium size suppliers.


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