Govt drops idea of defining online marketplace
Indian laws currently allow 100% FDI in B2B e-commerce but none in multi-brand retail and retail e-commerce
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New Delhi: The government has dropped the idea of defining the term marketplace, casting a cloud over the model widely used by e-commerce companies to circumvent foreign investment rules.
Marketplaces are websites that connect buyers to sellers, offering services such as warehousing, logistics and payments. There is no definition of an online marketplace under current FDI (foreign direct investment) laws.
Indian laws currently allow 100% foreign investment in business-to-business (B2B) e-commerce but none in traditional multi-brand retail and retail e-commerce—i.e., business-to-consumer, or B2C.
“We were initially contemplating coming out with a definition of marketplace. But we have dropped the idea. Technology is changing fast. It is not wise to define e-commerce companies one way or the other,” a Department of Industrial Policy and Promotion (DIPP) official said, speaking on condition of anonymity.
Two retail associations representing brick-and-mortar retailers, the Retailers Association of India (RAI) and the All India Footwear Manufacturers and Retailers Association (AIFMRA), have approached the Delhi high court arguing that online retail companies have been given undue advantage by allowing them access to FDI through which they are able to provide deep discounts that traditional retailers cannot match.
They also argued that the present retail policy of the government does not allow such e-commerce companies to directly sell to customers, but that, in the garb of the marketplace model, such online companies are directly selling to customers, thus violating rules.
In its affidavit submitted before the Delhi high court on 21 December, DIPP said the current FDI policy neither permits FDI in B2C e-commerce nor recognizes the marketplace model in e-commerce followed by companies like Flipkart, Snapdeal and Amazon.
“It is categorically denied that the answering respondent (DIPP) is seeking to help the alleged violators of FDI policy, that is, the e-commerce websites,” it added.
The Economic Times first reported details of the affidavit on 6 January.
DIPP through the affidavit also submitted that the department is only mandated with formulation of FDI policy and any violation of FDI regulations are covered by the penal provisions of the Foreign Exchange Management Act (Fema). “Reserve Bank of India administers the Fema and the Directorate of Enforcement under the ministry of finance is the authority for the enforcement of Fema,” the affidavit added.
A RBI spokesperson didn’t respond to an e-mail seeking comment.
An executive at an e-commerce company who spoke on condition of anonymity said Indian e-commerce companies identify themselves as technology platforms. “We are neither B2B nor B2C companies. We only provide the platform for e-commerce to happen where the seller and buyer come together,” he said.
Kumar Rajagopalan, chief executive officer of RAI, said: “From what we observe, the DIPP has clarified its stand on the issue and stated that implementation of the policy is in the hands of RBI and Enforcement Directorate. It automatically passes the onus of explanation to them. We need to seek clarification from them.”
Ashwani Mahajan, national co-convener of the Swadeshi Jagran Manch, an affiliate of the Rashtriya Swayamsewak Sangh and a body that promotes the cause of local businesses, said e-commerce companies, flush with funds from foreign venture capital firms, are violating the law of the land and should be banned.
“E-commerce companies are killing competition through huge subsidies. The government has failed to protect the interests of the small retailers,” he added. If these companies are exploiting a loophole in the law, it needs to be plugged immediately, he said.
In 2012, the then Congress-led United Progressive Alliance government allowed 51% foreign direct investment in multi-brand retail in some cities, subject to the approval of the state governments.
The current Bharatiya Janata Party-led National Democratic Alliance government is opposed to this, although it has not changed the policy itself.
In July, the cabinet allowed all companies including Indian supermarkets, to tap the equity market to raise foreign portfolio investment up to 49% without seeking the finance ministry’s approval.
In 2014-15, investors pumped in over $4 billion into Internet businesses.
The share of e-commerce is expected to jump from 2% in 2014 to 11% in 2019, while the share of physical, organized or modern retail is expected to fall from 17% to 13%, according to Think India. Think Retail, a report by property consultant Knight Frank India Pvt. Ltd and RAI.
Spokespersons for Jasper Infotech, which runs Snapdeal, and One97 Communications that runs Paytm declined comment while Flipkart did not respond to a request for comment.
Shrutika Verma contributed to this story.