The Revised Guidelines on FDI in E-commerce

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 E-commerce companies have become household names for alternatives of shopping in India, because of the convenience they offer. Anything from as small as a toy TV for kids, to as big as a real TV can be bought from these e-commerce sites in a matter of minutes. Till recent times, these companies offered heavy discounts on products through online sales and even otherwise. But now with the introduction of the new rules in Foreign Direct Investment (FDI) in e-commerce since 1^st February 2019, there will be a curb on such offers from e-commerce companies. In this article, I will try to explain what are these new rules all about.

E-commerce and its business models

According to the policy, “E-commerce means buying and selling of goods and services including digital products over an electronic and digital network”.

To understand it further we need to understand the models of e-commerce.

Inventory-Based Model: In this model, the inventory of goods and services is owned by the seller and the seller directly sells it to the consumers through its platform.

 For example, there is an e-commerce entity named Box that is into the online grocery business. It owns the stock of fruits, vegetables and groceries etc, that it sells directly to the customers through its online platform. Then Box is said to be following Inventory based model.

Marketplace Model: In this model, the e-commerce entity just provides an information technology platform on its digital network. It just acts as a facilitator between buyers and sellers. It doesn’t own the products being sold on the platform.

For example, there is an e-commerce entity named “River”. It has many categories of products listed on its platform. These products are sold by different sellers to the final customers. The entity River does not own these products. It is just acting as a facilitator between the sellers and buyers by providing with a platform. Then River is said to be following Marketplace Model.

It is important to note that  FDI is not permitted in Inventory Based Model.

The New Rules in the FDI Policy for E-commerce

1.   No ownership of inventory: As FDI is not allowed in Inventory Based Model, the e-commerce entities providing a marketplace for vendors will not be allowed to have ownership and control over goods sold on the platform by these vendors.

Moreover, if more than 25% of purchases from a vendor are through that marketplace entity then the control of the inventory would be deemed to be with the e-marketplace entity, which is not allowed as per the new rules.

For example, there is an e-commerce marketplace entity “River”. It has many vendors offering different products on its platform. But each vendor cannot sell more than 25% of its inventory on the platform of River. The vendor will have to sell the remaining inventory somewhere else. Even if the vendor chooses to sell it on another marketplace entity, “Spin”, there also it can only sell maximum up to another 25% of its inventory.

2.   Platform: For the purpose of considering “platform”, all channels of distribution like websites, internet applications, television channels etc. will be considered as a single platform.

This means, to calculate the purchases from a vendor named Fog from marketplace entity River, (from the previous example) purchases from all channels of the River, like the website, internet application etc, should not exceed the threshold limit of 25%. That is, if the purchases from Fog through River’s website is 20% then the purchases from Fog through River’s app should not be more than 5% of Fog’s inventory, else the control of Fog’s inventory will be deemed to be with River, which is not allowed as per the rules.

3.   Equity participation: As per the new rules, if the marketplace entity or its group companies have equity participation in any firm then that firm cannot sell its products on the platform of the marketplace.

For example, the marketplace entity Spin (from the earlier example) has equity participation in the firm named “Wolf”, then Wolf cannot sell its products on Spin’s platform.

4.   Cannot influence price: The marketplace entities cannot provide certain services for orders of only certain vendors and not provide those services to others and thus influence the price. Such services may include but not limited to faster delivery, cashback, advertising/marketing services etc provided by the group companies of the marketplace entity.

For example, marketplace entity River cannot influence the price of  related vendor named Fog over other vendors by providing faster delivery through group company for purchases from Fog.

It is important to note here that there’s no restriction on the marketplace entity to provide support services like logistics, payments through its group companies, but such companies should not influence the price of a product for any vendor.

5.   No exclusive agreements: Any marketplace entity cannot have exclusive agreements of sale with any brand to sell the products only on its platform.

For example marketplace entity Spin (from earlier example) cannot have an exclusive agreement with mobile phone brand Zen to sell the Zen’s mobile phones only on its platform.

6.   Contact details of seller: The name, address and other contact details of the vendor selling products on the platform of the marketplace entity should be clearly provided. Delivery of goods and post sales service is the vendor’s responsibility.

7.   Payments as per RBI guidelines: The payments made on the marketplace entity’s platform should be according to RBI guidelines.

8.   Auditor’s certificate: The marketplace entity will have to furnish a certificate and statutory auditor’s report to RBI before 30^th September every year, stating that the above guidelines were followed in the preceding financial year.

Why these Guidelines?

To know the reason for the introduction of these guidelines, let us understand a basic example.

Let’s assume that there is a wealthy man Mr Jay. He is mainly into the business of real estate. He builds shopping malls and gives shops on rent in his mall. He charges rent to the shopkeepers who open shops in his mall. Let’s say his mall begins to flourish and many shopkeepers open shops selling different products and have fantastic sales.

This gives Jay an idea that he should also open his own shop in the same mall, to earn more revenue. Since he is the owner of the mall, he chooses the best slot in the mall to open his shop. In that shop, he sells the bestselling products of the mall and his own products at a much lower price. He is able to do it since he has the infrastructure to do so in the form of his group companies.

But the existing shopkeepers in the mall are small. They cannot match the scale of Jay’s business and hence face losses.

The policy changes have been made to safeguard such small sellers.

Till now the following was happening

1.   Heavy discounts: Several complaints were filed by offline retailers against the e-commerce companies for giving heavy discounts.

2.   Exclusive Agreements: These e-commerce companies had exclusive sale agreements with brands that allowed them to sell products of that brand on a very low price that to exclusively on its platform. Thus having an unfair advantage.

3.   Control over entities: These e-commerce entities had control over certain companies in form of equity participation. These vendors were hence able to sell the same products at a discounted price.

Also as these vendors were related to the e-commerce entity. It was listed higher than the other sellers in the product listing. Thus were able to gain more sales.

Effects of the Revised Guidelines

1.   No more discounted sales: As there is a limit of 25% on total purchases from a single vendor on the platform, the discounted sales in which few vendors were benefited may now stop. This will also lead to an overall reduction in discounts as now the vendors wouldn’t be able to sell products in higher quantity as before.

2.   Goods sold by affiliate vendors stop: As per the new rules these marketplace e-commerce entities cannot list products from related vendors, so products of such vendors have been removed from the platform. This also includes own brands of these marketplace entities.

3.   Higher prices and delivery time: Now that the related vendors cannot sell products on these marketplace entities, the heavy discounts and faster delivery is not available for products that were sold by these vendors. As these vendors have been removed from the platform to comply with guidelines.

4.   No exclusive sales: As the new regulations prohibit exclusive sale agreements with brands, the exclusive listing of products on specific e-commerce marketplace entity would stop. This was more prevalent in mobile phones and other white-goods.

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