RBI has reviewed guidelines for FDI on E-commerce sector, which will affect retailers. New Norms may freeze Flipkart, Amazon models.
Before moving towards Guidelines for FDI on E-Commerce sector, mentioned below importance terms and definitions:
Ø Important Terms and Definitions:
1) E-Commerce activities:
|Sector/Activity||% of Equity/FDI Cap||Entry Route|
E-Commerce entity means a Company incorporated under Companies Act, 1956 or Companies Act,2013 or a foreign company covered under Section 2(42) of Companies Act, 2013 or an office, branch or agency in India as provided in Section 2(v)(iii) of FEMA, 1999, owned or controlled by a person resident outside India and conducting an E-Commerce business.
3) Inventory based model of E-Commerce:
An E-Commerce activity where inventory of goods and services is owned by E-Commerce entity and is sold to consumers directly.
4) Market based model of E-Commerce:
An E-Commerce activity providing Information Technology platform by an E-Commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.
Ø Guidelines for FDI on E-Commerce sector:
1) 100% FDI under automatic route is permitted in Marketplace model of E-Commerce.
2) FDI is not permitted in Inventory based model of E-Commerce.
(*Subject to provisions of FDI policy, E-Commerce entities would engage only Business to Business (B2B) E-commerce and not in Business to Consumer (B2C) E –commerce.)
Ø Other Conditions:
|1)||Digital & Electronic network will include network of computers, television channels and any other internet applications used in automated manner such as web pages, extranets, mobiles etc|
|2)||Marketplace E-Commerce entity will be permitted to enter into transactions with sellers registered on its platfom on B2B basis.|
|3)||E-Commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services.|
|4)||E-Commerce entity providing a marketplace will not exercise ownership or control over inventory i.e. goods purported to be sold.|
|5)||An entity having equity participation by E-commerce maketplace entity or its group companies, or having control on its inventory by E-commerce marketplace entity or its group companies will not be permitted to sell its products on the platform run by such marketplace entity.|
|6)||In Marketplace model, goods or services made available for sale electronically on website should clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the consumers and customers satisfaction will be responsibility of seller.|
|7)||In Marketplace model, payments for sale may be facilitated by the E-Commerce entity in confirmity with the guidelines of RBI.|
|8)||In Marketplace model, any warranty/guarantee of goods and services sold will be responsibility of seller.|
|9)||E-Commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing filed.|
|10)||Gudelines for cash and carry wholesale trading of Consolidated FDI policy Circular 2017 will apply on B2B E-Commerce.|
|11)||E-Commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only.|
|12)||E-Commerce marketplace entity will be required to furnish a Certificate along with a report of statutory auditor to RBI, confirming compliance of above guidelines by 30th September of every year for the preceeding financial year.|
(*Above guidelines will be effective from 1st February, 2019. FDI guidelines on E-Commerce is attached herewith.)
Ø Impact of new Guidelines on online retailers:
1) The revamped e-commerce norms are stricter in nature and will force online retailers such as Amazon and Walmart owned Flipkart and Myntra to tweak their business plans and revisit their Indian plans going forward.
2) The policy seems to be aimed at plugging the multiple loopholes that existed in FDI regulations governing the e-commerce sectors as well as tackling the anti-competitive behaviour of e-commerce entities.
3) E-commerce companies will have to go back to the drawing board and see if their business models comply with the new requirements that are effective prospectively from February 1, 2019.
4) The profitability target of these companies may now take a big hit. Also, the bar on E-Commerce companies from selling products from entities they have a stake in, could affect Amazon because it has a stake in its two major seller entities, Cloudtail and Appario.
5) The new norms bar exclusive tie-ups between E-Commerce firms that follow the ‘marketplace model’ and vendors using their platform. In a marketplace model, the E-Commerce firm is not allowed to directly or indirectly influence the sale price of goods or services, and is required to offer a level playing field to all vendors.
6) To emphasise this point, the new norms said cashback or services, such as quick delivery, offered by e-tailers have to be applicable to all vendors on their platforms. It also said that if a vendor sells more than 25% of its wares through an e-commerce marketplace, the latter will be deemed to have an inventory model, in which FDI is not allowed.
7) The 25% cap was there earlier, but the onus of ensuring it, is now firmly on the e-commerce platform, so that it does not find itself on the wrong side of the law. Further, E-Commerce firms will be barred from selling wares of related parties on the inventory, of which it has a say.