Let E-commerce in India Prosper

The FDI rules for trading are not new to controversy.

By Lalit Kumar | Updated: 18 June 2021 09:00 IST

Photo Credit: Reuters

The inventory based model of e-commerce was not permitted 100 percent FDI

It seems trouble for e-commerce entities in India is not going to abate soon. The two major foreign owned Indian e-commerce entities suffered a big blow when last week the High Court of Karnataka dismissed their plea to stop the Competition Commission of India's (CCI) probe. The CCI wants to investigate these entities for their alleged violation of competition law of India. The allegations are that these entities favour few selected and preferred sellers on their e-commerce platform which benefits them hugely but to the disadvantage of corner stores and small retailers. CCI believes this is unfair and anti-competitive and must be probed further.

The court's verdict paves way for CCI to continue with its probe. It seems the giant e-commerce entities haven't hung up their boots yet. They have both challenged this court order with the division bench of the court. The ball has been put back into the court's court.

This verdict of the court if not overturned by the division bench could have far reaching consequences, not only for these major e-commerce entities but for the entire Indian e-commerce industry and business. Further, believing that e-commerce entities flout foreign direct investment (FDI) rules by only following them in the letter of law and not in their spirit, the government has already planned to tweak the FDI rules further for this sector. So, there could be more troubles coming up for this sector soon.

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The FDI rules for trading are not new to controversy. This sector has been subject to many legal and political debates. FDI is said to be opened for this sector, yet it is not opened!

To give some perspective, let's look back a little. Major FDI reforms were announced in 2016. At that time, 100% FDI without any government nod was allowed for e-commerce but only for marketplace. This meant that e-commerce entities could only act as facilitators between buyers and sellers. The more profitable and tempting business of inventory-based model was not opened for FDI. This model was where an e-commerce entity could own and sell its own goods online on its e-platforms. The ban on FDI in inventory-based model was supposedly to protect the small and medium retail shops. This has always been the bone of contention.

While the e-commerce companies want to operate this business, the FDI rules do not permit them. There are strictures provided in FDI policy and various press notes and circulars of the government ensuring that no foreign owned e-commerce entity should own and sell its own goods. Thus, they should operate purely as marketplace entities. This makes doing business difficult for these entities. India's FDI appeal for this sector could certainly be said to be something like holding a placard which says – You're most welcome but we are tough place to do business! Make your own decision!

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The legal provisions aside, it won't be out of place to put some perspectives that show e-commerce and retail's contribution to India's growth. Undoubtedly, India is one retail market and has tremendous appetite to grow. E-commerce could be said to be around 3-4 percent of the market share of retail but even then, it has significantly added value to the communities and economic growth of the country. Statistically, the retail market in India could be said to be around $700 billion (approximately Rs. 51,95,319 crore). So, there is a huge potential for growth and to develop global technologies that can integrate mom and pop stores. All can co-exist. In terms of technology, the real benefit will be derived only when cutting edge local innovation will bring market access to medium and small-scale industries.

This has already begun. Small and scattered businesses could leverage this efficient and cost-effective channel to have market access beyond their local areas of operations. Overall the market and supply chain can be integrated nationally and then globally. So, e-commerce is truly an enabler of growth and not as a destructor, as may be perceived. In return, it expects favourable and conducive business environment to deliver India an economic growth and create abundant jobs.

The supremacy of law must be respected and adhered to in all circumstances. But it is equally important that businesses that have tremendous potential are given encouragement. The legal framework and its implementation need to be geared towards encouraging businesses including this important e-commerce sector to foster competition in many meaningful ways.

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While all rule flouting entities must be made accountable, but at the same time the business and industry require conductive business environment with clear and consistent legal policies. Taking narrow and conservative views of situations and making frequent amendments to policies and law could hurt investments. There is a need to strike a right balance if India really wants to be an investor friendly nation globally.

(The author is a partner with J. Sagar Associates. Views are personal).

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