Financial Reporting

How Government’s new FDI rules can affect E-commerce retailers and business

On the 26^th day of December of 2018, the government has made some Amendments to the existing FDI policy in e-commerce. In this article, we are going to discuss the changes which have been made. But before going ahead, let us discuss some important terms.

What E-commerce is all about?

E-commerce means buying and selling of goods and services including digital products over the digital and electronic network. For example buying and selling goods on the websites of Amazon, Flipkart etc.

E-commerce entity:

An e-commerce entity is a company incorporated under the Companies Act 2013 (earlier Companies Act, 1956) or a foreign company covered under the Companies Act, 2013 or an office, branch or agency in India operating under the regulations of FEMA (Foreign Exchange Management Act), which is owned or is controlled by a person resident outside India and conducting the business of e-commerce.

How are e-commerce classified?

The E-commerce is classified into models which are discussed below:

(i)  Inventory based model of e-commerce

Inventory based model of e-commerce is an e-commerce activity where the inventory of goods and services is completely owned by the e-commerce entity and is sold to the consumers directly

(ii)  Marketplace based model of e-commerce

Marketplace based model of e-commerce is an information technology platform by an e-commerce entity on a digital & electronic network to act as a mediator between buyer and seller. For example Amazon, Flipkart etc.

Regulations for FDI (Foreign Direct Investment) in e-commerce

Foreign direct investment (FDI) is generally an investment made by a firm or individual in one country into business interests located in another or different country. Read more about FDI here

The government follows a well-designed FDI policy in FDI. Now it has done some Amendments to the existing FDI policy.

After the amendments on December 26^th, 2018, following are the important provisions for FDI policy in the e-commerce sector.

• Now, E-commerce entities can engage only in Business to Business (B2B) e-commerce activities and not in Business to Consumer (B2C) e-commerce.
• FDI holdings in e-commerce entities- 100% FDI would be in market place model whereas no FDI in inventory base model.

1. i) Under automatic route, 100% FDI will be permitted in marketplace model of e-commerce.
2. ii) Now FDI is not permitted in the inventory-based model of e-commerce.

Table: FDI regulation in e-commerce

• Other conditions on FDI to be followed in the e-commerce sector.

The government has also added some additional conditions to the existing ones on 26^th of December 2018 which will take effect from February 1^st, 2019. The new guideline requires that a marketplace e-commerce firm can’t sell own products through its own platforms. Similarly, it can’t offer competition by offering cash backs. The market place firm cannot exercise ownership or control over the inventories of any other firm.

Below are the mentioned conditions in detail set by the reviewed FDI guidelines on the e-commerce policy. Please have a look:

1. The conditions are applicable to the Digital & electronic network which include a network of computers, television channels and any other internet applications such as web pages, extranets, mobiles etc.
2. I Marketplace e-commerce entity can now enter into transactions with sellers registered on its platform on a B2B basis.
3. E-commerce marketplace may provide important support services as required to sellers in respect of warehousing, logistics, order fulfillment, call center, payment collection etc.
4.  E-commerce entity providing a marketplace now cannot exercise complete ownership or control over the inventories.
5.  An entity having any kind of equity participation in e-commerce marketplace entity or its group companies or having control on its inventory will not be permitted to sell its products those platforms which are run by the marketplace entity.
6.  In the marketplace model, the details of the seller with complete name, address and other contact details must be clearly provided. After sales requirement, delivery of goods to the customers and customer satisfaction will be the responsibility of the seller.
7. In the marketplace model, payments for sale may be facilitated by the e-commerce entity in accordance with the guidelines of the Reserve Bank of India (RBI).
8. In the marketplace model, any kind of warranty/ guarantee of goods and services which are sold will be the responsibility of the seller.
9. Cash back provided by companies of marketplace entity to buyers shall be fair and non-discriminatory otherwise such cash backs will be deemed unfair and discriminatory on the part of such companies.
10. E-commerce marketplace entity will not mandate any seller to sell any new or specific product exclusively on its platform only.
11. E-commerce marketplace entity will now be required to furnish to the RBI a certificate along with a report of a statutory auditor to Reserve Bank of India, confirming compliance with these rules, regulations and the guidelines by 30th of September of each and every year.

The Amendments to the existing FDI policy as discussed are very important to note.

Why the changes in the existing FDI policies are required or important?

The Amendments to the existing FDI policy and guidelines would change the entire e-commerce business up to a certain level. From a very long time, offline traders have been complaining that e-commerce platforms with access to FDI were giving deep or heavy discounts and other incentives through related-party vendors, which they were unable to match.

The changes will affect the flexibility that e-commerce platforms used to have in doing business, and will force them to be neutral to all vendors.

An opinion of Government officials on the amendments

Government officials are of the opinion that the changes in e-commerce FDI norms are clarificatory in nature and are not new restrictions.

Impact of the decision on e-commerce companies and firms

The decision of Amendments to the existing FDI policy and guidelines will largely affect the e-commerce companies, such as Amazon and Flipkart which from last 8-9 years have been luring customers with heavy discounts and exclusive offerings which will ultimately affect the customer behavior. Most customers in India shop online for the discounts and exclusive offerings, which may not be available in offline stores or any other online trading platform and in turn will have an impact on the revenue and growth of e-commerce companies in India.

In short, the profitability target of such companies can now take a big hit in comparison to the offline traders.

Conclusion

The revamped e-commerce norms or the Amendments to the existing FDI policy are now comparatively stricter in nature and will force online retailers or companies such as Amazon, Flipkart, and Myntra etc. to revise their business plans and to take the further steps with utmost care.  The policy seems to be aimed at filling the multiple loopholes that existed in earlier FDI regulations governing the e-commerce sectors. It will also tackle the anti-competitive behavior of e-commerce entities. These guidelines have to be strictly followed effectively from February 1, 2019.