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Business News/ Politics / Policy/  Govt faces more questions on FDI in e-commerce

New Delhi/Mumbai: The government may have to hasten its efforts to define the term online marketplace and also explicitly mention what constitutes retail and wholesale trading on such platforms after the Delhi high court issued a notice seeking its reply to a petition filed by a body of offline (or brick-and-mortar) retailers.

The body, like other associations representing brick-and-mortar retailers, says that many online marketplaces are actually involved in the retail business, and that the foreign funding they get from venture capital and private equity firms, and hedge and sovereign wealth funds, is helping them offer deep discounts of the sort that traditional retailers can’t match.

Indian law doesn’t allow foreign investment in retail e-commerce or traditional multi-brand retail but allows it in marketplaces that link sellers and buyers.

In response to a petition filed by the All India Footwear Manufacturers and Retailers Association (AIFMRA), justice Rajiv Sahai Endlaw said there was a “prima facie case" of violation of foreign direct investment (FDI) rules. He issued a notice to the government and directed it to file an affidavit within two weeks.

Justice Endlaw said the very fact that the transactions of e-tailers are taxed by a state as a sale means that they are in a business-to-consumer (or b2c) business, which is a violation of the present FDI policy.

In May, the Delhi high court asked the government to consider a plea by the Retailers Association of India, another body representing brick-and-mortar retailers, for parity in foreign investment rules between e-tailers and retailers.

The government was to respond within four months.

Despite several meetings with both e-tailers and retailers, though, the government hasn’t been able to do this. Wednesday’s notice has the potential to reopen the policy debate on rules pertaining to foreign investment in e-commerce companies as well as multi-brand retail.

Mint reported on 4 September that India’s industry department was working on definitions of the term marketplace and also to elaborate on what constitutes retail and wholesale trading on such platforms.

Offline retailers, and their lobby groups such as RAI, want the rules to be the same. In effect, because FDI is being allowed in marketplaces engaged in retail trade, they argue, it should be allowed in multi-brand retail too.

In 2012, the then Congress-led United Progressive Alliance government allowed 51% FDI investment in multi-brand retail in some cities, subject to the approval of the state governments and some conditions regarding sourcing.

The current Bharatiya Janata Party-led National Democratic Alliance government is opposed to this, although it has not changed the policy itself. Perhaps because of its opposition, there have been no investment proposals in multi-brand retail. 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.

“We have sought the government’s help in clarifying the situation, as FDI rules cannot be applied differently to the so-called e-commerce marketplaces while retailers are not allowed to get FDI. The e-commerce marketplaces have been pricing products and have also been advertising themselves as online retail companies. We have been requesting the government to frame a policy that would create a level playing field for retailers across all channels. This directive might help setting the ball rolling in that direction," said RAI CEO Kumar Rajagopalan.

“E-commerce retailers are obviously retailers because the payment is accepted by them, delivery is made by them, returns are taken by them and refund are also made by them," advocate A.M. Singhvi, who appeared for AIFMRA, said in the Delhi high court.

In the petition, AIFMRA claims that the various e-commerce websites have been continuously dodging the question of FDI violations by camouflaging their business as a “marketplace" and not a “seller", when in reality a sale through online forums is akin in character to a sale made by a physical retailer.

There is no definition of the online marketplace model under the present Indian FDI regulation. Marketplaces are websites that connect buyers to sellers, offering services such as warehousing, logistics, and payments. Mint’s 4 September report quoted an unnamed government official as saying that the industry department would shortly circulate a draft cabinet note for inter-ministerial consultation ahead of laying down guidelines defining the marketplace model for e-commerce players.

In 2014-15, investors pumped in over $4 billion into Internet businesses and in the coming year they are expected to invest even more, Mint reported in April.

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.

“This discrimination between different forms of retail channels is not right and despite many presentations to the government to create a level playing field for modern retailers, it has yet not happened," said Rakesh Biyani, joint managing director, Future Retail Ltd. He added that e-commerce has provided overseas investors a back-door entry to retail in India.

That’s a popular view among traditional retailers.

“FDI is not allowed in offline retail, yet investments in e-commerce have created a backdoor entry for FDI in retail in India. However, as only online retailers are getting funding, it has made it difficult for offline retailers to compete with them and offer the kind of discounts they offer," said Rafique Malik, managing director, Metro Shoes Ltd, one of the petitioners in the Delhi high court.

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Updated: 02 Dec 2015, 02:34 AM IST
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