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April 8, 2013, 5:34 am UTC
The Indian e-Commerce consumer has been dealt with a severe blow to the financial & entrepreneurial dreams. The Central Government via its Department of Industrial Policy and Promotion (DIPP) has reaffirmed its earlier stand on Foreign Direct Investment (FDI) in Indian online retail companies.
The official wordings of the “Consolidated Foreign Direct Investment” Policy regarding companies which are presently being running for funds received from international companies are, “Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading”
Now the wordings here are absolutely clear regarding two main aspects: Multi-Brand Retail & Business To Consumer (B2C) Retail e-Commerce. Interestingly, Single-Brand Retail is still permissible. That explains why companies like IKEA, Nike & Apple managed an entry into India, but Amazon has to be satisfied with inorganic entry via Junglee.com.
Interestingly, the Government has allowed Business To Business (B2B) for the exact same process as evident from the circular, “E-commerce activities refer to the activity of buying and selling by a company through the ecommerce platform. Such companies would engage only in business to business ecommerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well”
In essentiality, the Government hasn’t differentiated the local physical sales to the online e-Commerce transactions. This in turn explains, why companies like Walmart or BestBuy haven’t been able to gain an official, open & sole entry within India.
So what’s the solution? Currently, for an active FDI, the companies have to comply with the norms stipulated in Foreign Exchange Management Act (FEMA) as well as regulations laid down under the Consolidated Foreign Direct Investment which comes under the parent FDI Policy. Furthermore there will be multiple checks as well as ‘Sectoral Caps’ (Upper Limit of investment as per the segment in which the company is operational)
However, the companies have cleverly started to shift to the ‘Marketplace Model’. Herein, the companies never take official custody of the inventory. The companies involved in e-Commerce merely sell ‘On-Behalf’ of merchants listed on their websites. Our readers must have observed multiple companies switching over to this beneficial model & avoiding the hassles with the Government.
So far the Indian Government has allowed foreign venture capital investors to contribute up to 100% of capital in a business enterprise in India only as far it is ‘Indian Venture Capital’ undertaking. Though this may be hailed as a move to ensure the regional players get protection from foreign onslaught & sufficient impetus too, it is an indirect blow to the average Indian customer who will have to wait indefinitely, to buy locally from companies of international repute like Walmart, BestBuy, Tesco. Do you think its right?
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