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100% FDI In eCommerce: A Boon Or A Bane For Ecosystem?

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100% FDI In eCommerce: A Boon Or A Bane For Ecosystem?
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Infusing the much-needed clarity on the ambiguous FDI policy existing in the eCommerce sector, the Prime Minister Modi's Government, recently permitted 100 per cent foreign direct investment (FDI) to the marketplace model, with a view to attract more foreign investments.

Global e-tailer behemoths are operating online marketplaces in India while indigenous players have foreign investments even as there are no clear FDI guidelines on various online retail models. An eCommerce firm carries its business either through marketplace model or inventory based model. As there was ambiguity in the definition, these firms were working around this loophole.

Now that marketplace model has been defined, it would be interesting to note whether this new policy will benefit existing eCommerce players.

Department of Industrial Policy and Promotion (DIPP) has further stated that no single vendor or a group company will be allowed to contribute more than 25 per cent to over all sales of a marketplace company. This rule will compel the eCommerce marketplace portals to curtail the sales from single vendor and focus on identifying sellers that provide quality products with efficient delivery model to compensate for the lost business.

Let us look at the impact that the new policy will have on the existing eCommerce players and the ecosystem at large.

The deep discounting strategy adopted by many eCommerce players might just end since the government is insisting that eCommerce companies only act as a platform to facilitate their listed vendors to sell, instead of underwriting minimum sales prices and offering discounts, and absorbing the resulting loss themselves.

This does seem like a boon in disguise as e-tailers would now be forced to push only such discounts that are absorbed by their vendor partners, which in turn may bring in profitability and investor confidence in these players. However, this would also lead to a challenge as online prices of products will start touching offline prices which could make online marketplaces less attractive to consumers and investors.

DIPP notes, "eCommerce entities providing marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain level playing field,". Thus Indirect discounting (not through pricing but through Marketing promos) will still be there and this may not affect discounting scenario too much.

Additionally, eCommerce valuations may shrivel as these companies will no longer be able to show huge growth in terms of revenues. On the positive side however, the profitability will recover as heavy discounts end, and that should improve investor perception about these companies, and subsequently valuations.

Restructuring is on the fore for eCommerce players as DIPP clarified that an eCommerce firm will not be permitted to sell more than 25 per cent of the sales affected through its marketplace from one vendor or their group companies.

Many eCommerce firms currently drive majority of their sales through their related arms and logistics firms. This is a restrictive policy as well and the eCommerce players don’t have much control in who buys from where. Thus, eCommerce companies will not be able to give any warranty on the products sold and they would also have to rework the mode of operation to that part too.

However, there is clarity on the role that a marketplace would play. Support service rendered by these eCommerce companies will give greater thrust to the investment and growth climate of such companies.

Another impact of the policy would be that it would give level playing field for offline and also for scarcely funded eCommerce companies, since it restricts the role of a marketplace player. eCommerce companies have actually become retailers themselves by working around the ambiguities of the policy, offering deep discounts, which created lot of disparity hitherto.

Now these eCommerce companies will be forced to restructure their model of operation in order to raise funds at their current valuations. Also, since FDI is not permitted in inventory based model, raising higher amounts of funding would be a difficult task.

The new policy structure may be a sign of good things to come in the form of a roadmap towards creating a Goods and Services Tax(GST) that will create a uniform tax structure for movement of goods across the country. It may be a sign of creating listing norms which will allow eCommerce to list in India even with mounting losses.

The DIPP note has allowed some breathing space for these businesses because more foreign money will mean that there will be more jobs and more pin codes can be covered.

The money coming in will certainly increase consumer choice and benefit them in the long run in the form of reduced prices and quality products.

For the Central Government it seems to be the best way to push the interests of the small seller and the job seeker. The eCommerce industry could not have asked for too much. The opportunity has fallen right on their lap to acquire 500 million more Indian consumers.

The stipulation here is that global markets should continue to chase the run else with current signs of geo-political unrest and a slowing economic cycle, eCommerce in India will not be viable in the long run for home grown domestic companies. Given the momentum, eCommerce will continue to be highest FDI sector which will help in improving back end operations and hence long term efficiency in the industry.

Edition: December 2016

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