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How FDI Rules Changed the Game in E-Commerce Sector FDI laws have been changed to preserve MSME community which has been grappling to uphold the business

By BusinessEx Staff

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The Indian e-commerce market has seen the emergence of new players over the years who opt-in to deliberately compete with niche companies. However, the prevailing oligopoly makes it tougher for the Indian e-tailers to survive. Witnessing this downtrend, the regime decided on to change the FDI rules on 26 December 2018. The move had been taken to preserve MSME community which has been grappling to uphold the business.

In a research report, Statista states, "India, a fast-growing emerging Asian market, shows optimistic projections for the e-commerce industry. Current active e-commerce penetration in India stands only 28 per cent, with lots of room for improvement - India's retail e-commerce CAGR is projected to reach 23 per cent from 2016 to 2021." This untapped (e-commerce sector) market was recognized and later, exploited by foreign e-commerce companies, in turn, toughening the competition for MSME. In order to shield MSME from further harm, the government amended FDI laws and impeached giant e-tailers—Amazon and Flipkart for not complying with laws.

How Amended FDI Laws Toppled The E-Commerce Sector

A year ago, giant e-commerce companies were earning hefty revenues on the cost of damaging the unorganized retail sector. This inequality in the market caught notice and subsequently, triggered a move against foreign-backed e-tailers.

At the moment, the Indian market comprises flourishing e-commerce sector as well as the unorganized sector. So, it is imperative to create a balance between both the sectors and the currently executed FDI rules. Originally, the problem in the e-commerce sector has arisen from two existing models namely: market place and inventory.

In prior e-commerce models, Indian regime permitted 100 per cent FDI in the business model. Further, New Delhi, known as a capital city of India, did not permit inventory-driven e-commerce models. In relation to US standards, the precise e-commerce models transact in goods and services which are possessed by the e-commerce companies and are directly sold to customers. The restrictions that have been made to persevere the unorganized retail sector in India. These issues have been reported by Economics Times.

To counter these issues, the regime has formed regulations to subdue inventory. According to new FDI guidelines, Existing regulations state that e-commerce firms cannot exercise ownership over the goods sold on their online marketplace. Both Amazon and Flipkart developed complicated seller structures that helped them comply with the inventory control rule while exercising some level of control over inventory. Traders and small online sellers have accused Amazon and Flipkart of violating the spirit of the law and of using the structures to offer deep discounts, accusations they deny, as reported by Economic Times.

The move has begotten the market topsy-turvy and further, slid down sales of Amazon and Flipkart for the third time.

Giant Foreign E-Tailers Take On The Issue

When the government inferred the alteration in FDI laws, Walmart backed Flipkart and Amazon approached the regime to ease down the regulations. The giant e-tailers requested the government to extend the deadline by six months as they would be able to conform to newly established rules. In essence, the regime-led move gripped the extensive use of inventory as well as catering exclusive offers.

Owing to which, the giant e-tailers are facing a bad phase in the sector and has voluntarily closed self-managed sellers Cloudtail and Appario. Even, on January 31, 2019, DIPP(Department of Industrial Policy and Promotion) rejected the request of e-commerce companies to extend the deadline. In a statement, DIPP said that after due consideration, it has been decided, with the approval of the competent authority, not to extend the above deadline as reported by Inc42.

So, all doors for the escape have been tightly sealed for e-commerce players and they have to oblige to government's decision.

Small Retailers Welcomed The Move

Retailers, who comprise a large share in the retailing industry, heartily welcomed the move. They were ecstatic that the government realized their problems and helped create a level playing ground. In terms of changed FDI rules, Sanjay Sethi, co-founder and CEO, ShopClues said that DIPP's notification declining the extension of Feb 1st deadline it had given to the violators of the FDI norms in e-commerce is very welcome. It is a win for the MSME community in the country moving them one step closer to a level playing field. It also sends a strong message to the violators that legal jugglery, exploiting loops holes and in general disregard for the law will have to stop now. Today, millions of MSMEs can breathe a sigh of relief, reported by Inc 42.

The move has created mayhem in the sector; though, normalcy will be returned soon in the e-commerce sector in the coming months.

This article was originally published by Jaspreet Kaur.

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