History of FDI in e-commerce in India

E-commerce can be described as simply the method to conduct business through electronic means and
via internet rather than using conventional means for it.1 E-commerce includes buying/selling of
goods and services as well as transfer of funds and data over an electronic network.

India has a user base of around 354 million as of September 2015.2 Over the last two decades there
has been a rapid increase in mobile and internet users. With increasing user base there has been a
massive growth in e-commerce sector too though as compared to economic giants like United States
and China this sector in India has a long way to go. From 2009 to 2013 e-commerce grew by almost
35% (compound annual growth rate) rising from $3.8 billion in 2009 to $12.6 billion in 2013.3 The
sector grew to $23 billion in 2015 and is expected to reach $38 billion mark in 2016.4

In 2012, Government allowed 51% FDI in multi brand retail, but retail trading in e-commerce for
companies with FDI was not allowed under these guidelines. Also State governments would take the
final call in allowing 51% FDI in multi brand retail. Since e-commerce does not have any specific
geographical boundaries it created a lot of confusion as well as loopholes.5 Moreover there has been
no definite definition of marketplace model and inventory based model up until now. In marketplace
model a technology platform (e.g. Flipkart, Snapdeal) connects and facilitates transaction between
buyer and seller. Department of Industrial Policy and Promotion (DIPP) as stated in it’s discussion
paper6 published in 2014 were of the view that allowing FDI in e-commerce will be against the spirit
of FDI in multi brand retail, which restricts FDI to cities with a population of more than one million
or any other city as per the choice of consenting states, since FDI in e-commerce will provide e-
commerce companies with complete geographical access.7 There being no restrictions on FDI in
business to business transactions (where transactions occur between businesses, such as those between
a manufacturer and wholesaler or between a wholesaler and a retailer)8 allowed e-commerce players
such as Flipkart and Amazon to function in India and receive foreign investment also.

Analysis of the decision taken by Central Government

E-commerce companies such as Amazon and Flipkart have been accused of violating the FDI policy
by acting as retailers and creating complex business structures to evade the law.9 In a petition filed by
Retailers Association of India and All India Footwear Manufacturers and Retailers Association
(AIFMRA), a case study was done which provided Amazon Asia had a huge stake in Cloudtail which
infact was one of the largest sellers on Amazon India. Similarily Flipkart was found to have
operational control over WS Retail which accounts for majority of products sold on Flipkart.10 Hence

1
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/E-Commerce_in_India.pdf
2
Neha Aliwadhi, India’s internet user base 354 million, registers 17% growth in first 6 months of 2015: IAMAI
report, THE ECONOMICS TIMES, September 3, 2015.
3
ASSOCHAM India, Evolution of e-commerce in India, at
https://www.pwc.in/assets/pdfs/publications/2014/evolution-of-e-commerce-in-india.pdf
4
YOUR STORY, http://yourstory.com/2016/01/indias-e-commerce-assocham/
5
Madhulika Srikumar, To B2B or Not: Brief in Ecommerce and FDI Policy in India, at
http://www.legallyindia.com/blogs/to-b2b-or-not-brief-on-ecommerce-and-fdi-policy-in-india
6
Department of Industrial Policy and Promotion, Discussion Paper on E-commerce in India 2013-14, at
http://dipp.nic.in/English/Discuss_paper/Discussion_paper_ecommerce_07012014.pdf
7
Allowing FDI in e-commerce has pros and cons: DIPP paper, THE ECONOMICS TIMES, January 8, 2014.
8
Investopedia, http://www.investopedia.com/terms/b/btob.asp
9
Supra Note 5.
10
Supra Note 5.
these ecommerce companies have been accused of being the actual retailers instead of facilitators
between sellers and buyers. Conferderation of All India Traders raised similar concerns in a complaint
filed to DIPP against Flipkart, Amazon and Snapdeal, since they have been offering huge discounts
during festive seasons. Indeed these companies providing huge discounts during festive seasons raises
a lot of suspicions that they are in fact functioning as retailers and following the business to consumer
(B2C) model instead of the business to business model (B2B). To resolve these issues the Central
Government had to take a definite decision, and had to fill all the loopholes. Government needed to
provide clarity on marketplace model and inventory based model as well as define what actually e-
commerce is and whether it is B2B or online retail in effect.

On March 29, 2016, the Government with a circular titled “Consolidated FDI Policy Circular 2015”,
allowed 100% FDI in B2B e-commerce under the marketplace model through the automatic route.11
However B2C FDI is still restricted. This comes as a sigh of relief for many e-commerce players as it
legitimizes the business of ecommerce companies in India. Also marketplace model and inventory
based model is defined in this circular providing more clarity on the law. Marketplace model has been
defined by DIPP as providing of IT platform by an e-commerce company on a digital and electronic
network, acting as a facilitator between the actual seller and buyer/consumer.12 Inventory based model
was defined as e-commerce activity where inventory of goods and services are owned by e-commerce
company and it is directly involved as the seller of those goods and services to the consumer/buyer.13

The circular also potentially ends the discount era, as it wants ecommerce players to function as
platforms and does not allow marketplaces to offer discounts to consumers. The total sales from a
particular company or one vendor has also been restricted to 25 %.14 Ecommerce companies will now
be forced to provide only such discounts approved by vendor partners which can bring profitability
and investor confidence in these companies.15 However this also makes online retail market less
attractive to consumers since the prices will now be comparable to offline retail stores.

The valuation of e-commerce might shrink with this policy as these companies will not show huge
growth in revenues for a while but at the same time investor perception about these companies will
improve to a great extent since they no longer will be providing heavy discounts. Since major
ecommerce companies like Amazon and Flipkart drive majority of their sales from the companies
they have stake in, these companies will have to restructure themselves since with this new policy
only 25% of sales can be facilitated through a particular vendor.

Pros and Cons of this scenario

The decision will have a lot of pros or positives. 1) It will provide legitimacy to lot of ecommerce
companies in India who had been following the marketplace model. While earlier there was no
definite definition of this model, now the ecommerce players are free to function with this model. It is
a big relief for them since DIPP had stated earlier this year that marketplace model used by Flipkart

11
Govt defines e-commerce marketplace rules, allows 100% FDI,
http://www.livemint.com/Politics/hglep85yZOQzChj6KRrrCK/Govt-allows-100-FDI-in-ecommerce-
marketplace-model.html
12
Alok Patnia, What 100-pc FDI in marketplace model spells for e-commerce companies as well as their
customers, http://yourstory.com/2016/04/fdi-online-marketplace-impact/
13
Ibid.
14
Supra Note 11
15
Supra Note 12
and Amazon was not recognised.16 2) The new law gives a lot of clarity to the FDI policy regarding
ecommerce hence this will also reduce the number of litigations against ecommerce companies and
they will be able to function more efficiently without the fear of heavy penalties which they earlier
had. 3) FDI in B2B was allowed earlier as well, but the exact percentage varied from time to time, but
now since the policy is clear the investors’confidence will improve as their doubts will be removed. 4)
Since government is considering taxing of e-commerce activities this new decision can lead to growth
of government revenue as well.

Cons: 1) It will be disadvantageous for consumers as the discount era is over. Also the prices will be
comparable to offline retail stores making ecommerce less beneficial and attractive for consumers. 2)
FDI in B2C is still not allowed. This will negatively impact small B2C online entrepreneurs/startups
which are attempting to raise funds in-order to expand.17

Conclusion

In conclusion I will say that the Central Government’s decision is definitely a welcome one. The new
policy provides clarity as well as legitimacy to the e-commerce business which will lead to better
functioning of this sector as well as growth with time since the investor confidence will improve over
time. If we want to compete with ecommerce giants like US and China a proper regulatory framework
is important and this is the step towards it.

16
Mohul Ghosh, Govt. Allows 100% FDI in Marketplace Ecommerce But Restricts B@C; Amazon, Flipkart
Stunned Into Silence, http://trak.in/tags/business/2016/03/30/ecommerce-fdi-marketplace-amazon-flipkart-
snapdeal/
17
Ibid.