Almost 10 years after e-commerce took off in India, the National Democratic Alliance government on Tuesday allowed 100 per cent foreign direct investment (FDI) in ecommerce on the marketplace model.
The reform comes just ahead of Chinese major Alibaba's proposed entry into the country. It also coincides with a recent markdown in valuation of ecommerce companies.
Some of the prominent ecommerce marketplace players in India are Flipkart, Snapdeal, ShopClues and Paytm - all funded by marquee foreign investors. American major Amazon, the biggest rival for Flipkart, too entered India as a fully-owned online marketplace player two years ago.
The sector has got an estimated $10 billion (Rs65,000 crore) of foreign investment in recent years. In 2015, around $5 billion (Rs32,500 crore) of foreign funds were raised by ecommerce companies.
Even now, no FDI is allowed in inventory-led online businesses that companies such as Amazon have in the US.
Till now, policy guidelines had stated that no FDI was permitted in ecommerce.
While liberalising ecommerce, the Department of Industrial Policy & Promotion (DIPP) has introduced conditions to ensure that platform owners do not turn sellers. Some of the conditions are that sales cannot exceed 25 per cent for any vendor, marketplace players or their group companies cannot sell, guarantee and warranty must be the sole responsibilities of the sellers, and platform owners cannot influence pricing of products.
International consultants and analysts claim that the government's move will bring in greater foreign investment into a sector that is set to grow from $16 billion to $70 billion by 2020 (excluding travel).
But domestic traders' body Confederation of All India Traders (CAIT) has hit out at the government, calling it a U-turn in policy that will permit backdoor entry to global players.
International players as well as Indian entrepreneurs have exploited the grey areas in the policy till now, running online operations with dollar funds from marquee investors.
Online marketplace platforms, where companies such as Amazon India, Flipkart, Snapdeal and many others hosted thousands of sellers, were described as technology enablers rather than e-retailers. They claimed to have no inventory of their own. That kept them going even with a ban on FDI in ecommerce. The government has now put an official stamp on how the ecommerce majors have for many years operated their business.
Almost two years after coming to power, the NDA has brought some clarity to the sector. Multi-brand retail, however, continues to be a category open to interpretation.
While its predecessor, the United Progressive Alliance had permitted 51 per cent FDI in multi-brand retail, the NDA is opposed to foreign investment in the area as that could result in loss of jobs for local traders and neighbourhood stores. It has, however, not changed the rulebook on multi-brand policy, execution of which is anyway with states.
The DIPP has clarified that 100 per cent FDI is only for the marketplace format of ecommerce, where the company provides a platform to act as a facilitator between buyers and sellers - and not for the inventory-led model.
It has defined e-commerce as buying and selling of goods and services, including digital products over digital and electronic network.