Central government permits 100% FDI in e-commerce trading

However, given the guidelines by the Department of Industrial Policy and Promotion (DIPP), foreign direct investment is yet not permissible in the inventory-led e-commerce models.
FDI

With all focus to strengthen its ‘Make in India’ project, the central government on Tuesday has finally given a green signal to 100% FDI (foreign direct investment) in the marketplace model of e-commerce trading in the country. The move comes ahead of PM Modi’s US visit and will surely boost online firms to gain foreign investment for better expansion and growth.

However, given the guidelines by the Department of Industrial Policy and Promotion (DIPP), foreign direct investment is yet not permissible in the inventory-led e-commerce models. FDI in e-commerce and retail has been one of the hotbed topics of debate in the market since ages even as there we minimal clarity on FDI norms. In order to dip down the chaos, the DIPP has also come out with the definition of e-commerce, inventory-led model and marketplace-model. A marketplace entity will be permitted to enter into transactions with sellers registered on its platform on business-to-business basis, DIPP said.

An e-commerce firm, however, will not be permitted to sell more than 25% of the sales affected through its marketplace from one vendor or their group companies, it added.

With this notification by the central government both domestic and global online giants such as Flipkart, Snapdeal and Amazon India are expecting a much organised e-commmerce environment. Great to see the guidelines around 100% FDI in ecomm marketplaces. Glad the govt recognises and supports an industry transforming India!, tweeted Kunal Bahl, Chief Executive, Snapdeal.

Over the past decade, Indian online marketplaces have been injected by massive funding from foreign investors and this move will surely open gates for many startups operating in the same space.

Expressing their excitement on the notification, Nasscom said that this is a clear indication that the government identifies marketplaces as an electronic intermediary, operating a technology platform to facilitate sales and transactions between independent third-party sellers and buyers.

Nasscom added that it is extremely glad to see the reiteration of FDI policy 'as is' on the services sector, and also on sale of services through e-commerce.

“The move will help companies in multiple ways as opening doors for foreign investments will enable them to focus on core business proposition and further access to funds. The clear definition by DIPP for market place and inventory based models of e-commerce will help in structuring the industry,” said Ujjwal Trikha, Fouder & CEO, FurnitureDekho.

The marketplace model has played a pivotal role in the growth journey of e-commerce in India. It has not just made an organised vendor ecosystem but, also made products easily available to consumers across urban and rural India. “The clarity around distinct classification of e commerce through inventory and marketplace models is a much needed step by the DIPP and brings certainty in the minds of investors and shareholders.  The e commerce sector has long witnessed ambiguity, open to challenge by various industry groups on potential FDI norm violations,” said Angshuman Bhattacharya, Lead Consumer and Retail, Managing Director with Alvarez & Marsal.

But, not to forget the fact that a single vendor or a group company for country’s leading e-commerce players account for around 40 percent sales and this notion will surely impact the business for the new comers in this space. As per Amarjeet Singh, Partner- TAX, KPMG, still there are issues of concentration risks and the restriction might create some problem for the existing players.

As of now, e-commerce in India has thrived upon its deep discounting policy and marketplaces have often burnt their own pockets in order to lure more customers but, this new rule will surely add immense pressure on players now. These marketplaces will have no control on deciding the price of a product and will only organise sales where the vendor participates. 

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