Govt. Allows 100% FDI In Marketplace Ecommerce But Restricts B2C; Amazon, Flipkart Stunned Into Silence

Government of India has issued new notifications related with FDI in ecommerce, under their circular titled ‘Consolidated FDI Policy Circular 2015’ (FDI Policy); and the news is both good and bad for the digital sector.

Going by the details, it seems that Government is attempting to walk on a thin line on this issue – it wants to please brick and mortal traders, and at the same time, they wish to welcome foreign investors and convince them to invest in ‘selected’ digital businesses.

The Good News

The best part about this new notification is that, Government has finally ‘officially’ recognized market place model under B2B ecommerce, and have allowed 100% FDI in this sector. Hence, if Alibaba wants to create an India specific marketplace which will connect buyers and sellers, they can do so without any issues.

Similarly, Flipkart (incorporated in Singapore) can now receive more funds and Amazon’s marketplace can be infused with more dollars coming in from USA.

Earlier this year, Department of Commerce and Department of Industrial Policy and Promotion (DIPP) had stated that marketplace model used by Flipkart and Amazon is not recognized and this had induced a certain fear among the players of this niche.

Besides, there were several investigations, probes, threats and accusations related with FDI violation by both state and central Governments. Such unnecessary arm-twisting would now end, as rules are now clear and open.

However, FDI in B2B was allowed earlier as well, but the exact percentage varied from time to time. For example, doubts still remain on 51% FDI on multi-brand retail under B2B but as 100% FDI is now allowed for B2B market place, this doubt shall be removed as well.

The Bad News

There are several bad news for the sector hidden in the optimistically sounded and worded notification by DIPP.

First, the market place provider (read Flipkart, Amazon, etc) cannot ‘influence’ the pricing of the products sold on their marketplace; which essentially means that the era of discounts is now over. Government will keep a strict vigil on how much ‘influenced’ the sales are, and a new guideline policy may soon emerge which may contain rules pertaining to discounts and pricing.

The other bad news is that, a single seller (vendor) may only participate in 25% of the overall sales in the marketplace. This news has stunned Flipkart into silence as it’s a well know insider fact that their own subsidiary WS Retail is the biggest seller on their platform; and from now on, they cannot sell more than 25% of the overall sales on Flipkart.com.

Besides, Amazon too sell their own products via Cloudtail India, which is a JV between Amazon and Infosys co-founder NR Narayana Murthy’s investment firm Catamaran Ventures. As per reports, around 40% of overall sales on Amazon happens via Cloudtail India.

Maybe this was the reason that last year, Flipkart and Snapdeal had opposed FDI in B2B ecommerce business.

There has been no reaction from either Amazon or Flipkart regarding this new development.

The Ugly News

The most hard-hitting news is that FDI in B2C is still not allowed. This will negatively impact small B2C online entrepreneurs/startups which are attempting to raise funds in-order to expand. Hence, with this stringent rule, these smaller B2C players need to be dependent on larger B2B marketplace platforms for selling their products; and this is not a good news.

The clear intentions of Govt. is to protect local traders who are into brick and mortar business; as they are allowed to raise FDI in-order to expand digitally. But vice-versa is not allowed.

However, a positive update is that, Indian manufacturers, who wants to sell their products inside India using digital medium would be allowed to accept FDI; and this is a silver lining which can be expanded to selling outside India as well.

We will keep you updated as more details come in.

You can read the new notifications related with FDI in ecommerce issued by DIPP here.