The restrictions for e-commerce foreign operators under the Indian FDI policy

India has the second-largest internet userbase in the world, only behind China in terms of numbers, with more than 475 million users. Indeed, India has experienced a rapid growth in smartphones and internet connectivity across the country, especially in tier-2 and tier-3 cities, which has lead to the overall development of the e-commerce sector, which, according to an analysis conducted by PwC, is expected to reach a value of 100 billion USD in 2022.

Whilst this expansion has encountered the favour of foreign investors, following complaints from local Indian retailers and traders about anti-competitive practices from Amazon and Flipkart (owned by Walmart), foreign direct investments in the e-commerce field have been subject to important limitations in accordance with the Review of Policy on Foreign Direct Investment (FDI) in e-commerce issued by the Indian Ministry of Commerce and Industry, and in force since February 2019.

The policy, in fact, distinguishes among (A) the Inventory based model of e-commerce, which is not permitted to foreign investors, where the inventory (i.e., the goods purported to be sold) is owned by e-commerce entity and is sold to the consumers directly and (B) the Marketplace based model of e-commerce, where the e-commerce entity only provides an information technology platform and acts as a facilitator between buyer and seller.

This means that, under the FDI regulations, foreign-owned e-commerce companies are not allowed to sell directly to customers, but can only provide a marketplace that acts as “an information technology platform” and serves as a facilitator between buyer and seller.

Moreover, E-commerce entities providing a marketplace shall not exercise ownership or control over the inventory. The inventory of a vendor will be deemed to be controlled by an e-commerce marketplace entity (e.g., Amazon) if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.

The practical effect of this limit is that e-commerce firms could no longer form exclusive selling arrangements with sellers or offer steep discounts to consumers based on those deals. As reported to CNBC by Mr. Satish Meena, senior forecast analysis at Forrester, “this will significantly impact the availability of products on these platforms in the short term as these sellers account for minimum 45-50 (percent) of sales on these platforms”.

The rules are widely seen as a populist move by Prime Minister Narendra Modi to protect millions of small, family-run shops from the threat of these global giants.

However, Amazon and Walmart are clearly not ready to give up on a market that is expected to grow fivefold in less than a decade. Indeed, contrary to expectations, e-commerce giants seem to have found a way to deal with the restrictions meant to provide a level playing field for local vendors.

A recent report from Counterpoint Research shows, for instance, that smartphone shipments through online channels in India were at their highest ever share of 43% in the January-March quarter of 2019, and that Amazon in the same quarter registered an impressive 38% YoY growth.

As for Walmart, it is reported that its international operating income had declined 2.8% in constant currency (exchange rates that eliminate the effects of currency fluctuations) and the dilution from Flipkart in India played a big part in that. Nevertheless Doug McMillon, Walmart’s president and CEO, declared that “In India, we remain optimistic about the e-commerce opportunity given the size of the market, the low penetration of e-commerce and the retail channel, and the pace at which it’s growing (…) in the future, we hope to work with the government for pro-growth policies that can allow this nascent industry and the domestic manufacturers, farmers and suppliers to benefit from it develop and prosper.”

Nevertheless, more time will be required in order to better understand the overall impact of the new policy for both foreign investors and Indian customers.

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