Programming Power

What India e-commerce policy entails for online retailers

4 min read . Updated: 16 Jan 2019, 08:05 AM ISTAsit Ranjan Mishra

The new rules for FDI in e-commerce, to be implemented from 1 February, could throw a spanner in India's thriving online retail sector.

In a speech at the All India Traders Convention on 27 February 2014 ahead of the general election, Bharatiya Janata Party’s prime ministerial candidate Narendra Modi surprised everybody by not playing to the gallery.

“I don’t know whether I will gain politically or not by saying this," Modi told an audience full of traders, his party’s core vote bank. “Whether you like it or not, we need not be afraid of the global challenges in the business world. We should convert this to opportunity. We should not think that ‘if online trade comes, we will be finished’. You should demand (of) the government how to increase your capability to meet this new global challenge rather than telling the government, ‘shut down online trade’. How will you stop it? We have to accept the modern science and technology. We should not plan to flee, but to fight," Modi said.

Four years later, after extensively liberalizing retail trade, except allowing foreign direct investment (FDI) in multi-brand retail—which was a 2014 manifesto pledge—Modi is showing signs of nervousness. Poll reverses in recent state assembly elections and a resurgent opposition seem to have forced Modi to cosy up to his original voter base, the traders.

On 26 December, a day after Christmas, while festive sales peaked, the department of industrial policy and promotion (DIPP)—the nodal agency for formulating FDI policy—surprised everybody with fresh regulations that could throw a spanner in India’s thriving e-commerce marketplaces. The Modi government allowed 100% FDI under the e-commerce marketplace model but prohibited FDI in inventory based e-commerce. In the first, e-commerce companies act as platforms for vendors to sell their products and in the second, they can sell their own products.

The changes, which will take effect on 1 February, are five-fold: First, marketplace entities cannot buy more than 25% from a single vendor; second, marketplaces will not directly or indirectly give discounts on products; thirdly, entities in which there is equity participation by the marketplace entity cannot sell their products on the platform run by the marketplace; fourthly, e-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only; and fifthly, marketplaces will have to submit a compliance report to the Reserve Bank of India (RBI) by 30 September every year.

While the first and second criteria were mandated even earlier, the DIPP always looked the other way when they were violated. The latest changes in the policy are widely believed to be a political move ahead of the general election due in April-May to assuage the trading community which has been hit by demonetization and the implementation of the goods and services tax.