Govt May Allow 100 Per Cent FDI In Online Marketplace Soon

After a wait for almost a decade and billions of dollars' worth of investments across various e-commerce websites through many routes, the government is one step short of allowing up to 100 per cent foreign direct investment (FDI) in the marketplace format of e-commerce. The Department of Industrial Policy and Promotion (DIPP) has moved a proposal to this effect which is now awaiting approval from the Finance Ministry and the Union Cabinet.

So far, the FDI norms do not allow a direct inflow of foreign funds in online or offline multi-brand retail or the online marketplace ventures. But as the FDI norms allow foreign investments in online marketplace websites, Flipkart, Snapdeal, Paytm, Jabong, Myntra and other e-commerce sites have been able to raise billions of dollars in FDI. Also, the existing rules allow 100 per cent FDI in the cash-and-carry or wholesale business, so a number of such e-commerce players have floated B2B ventures in order to get FDI.

However, most of these players are under the scanner of investigating agencies and courts over allegations of taking advantage of the loopholes in the current FDI norms, a charge which has been denied by everyone operating in the e-commerce space. Therefore, clarity in rules to FDI in online marketplace is expected to help all e-commerce marketplace ventures now, some of whom are valued at $1 billion or more.

Who Benefits?

The DIPP proposal once accepted will help most of the online marketplace websites. It will also give a boost to the Central government's drive to simplify the ease of doing business norms and the startup policy. Moreover, it is also expected to help the government sort out the ongoing legal matters and investigations into a number of e-commerce ventures after the Delhi High Court in November last year had asked the central government to probe 21 e-commerce players for alleged violation of FDI rules. These 21 websites were listed in a petition by an industry body - All India Footwear Manufacturers and Retailers Association - that wanted the government to probe the violations of foreign investment laws.

All of e-commerce’s biggest names, including Flipkart and Snapdeal, figure in the complaints. The government has already asked the Enforcement Directorate, which investigates violations in foreign exchange rules, and the Reserve Bank of India to probe the six companies that have allegedly violated FDI norms.

Sources said the DIPP's proposal follows last month's meeting between Prime Minister Modi and the promoters of Flipcart, Snapdeal, Paytm and others on the sidelines of the Start-Up event.

Why Investigate?

The ongoing investigations into some of the e-commerce websites are based on complaints filed by various industry bodies who have alleged that under the garb of online marketplace, these e-commerce portals are engaged in multi-brand retailing.

Thus the investigations are expected to help determine the nature of operation of the websites — B2B, B2C or B2B2C. India allows FDI in so-called online marketplaces, which connect buyers to sellers and provide services such as payments, promotion and delivery but the current laws do not allow FDI in multi-brand retail, offline or online.

The FDI rules in the retail sector have largely remained complex since the UPA government had allowed 100 per cent FDI in single-brand retail while imposing FDI restrictions on multi-brand retailing. That has caused confusion among government agencies and e-commerce firms with each interpreting the norms differently.

FDI norms for multi-brand retail, single-brand retail, cash-and-carry, e-commerce, market place differ from each other in their fine print. The UPA government had allowed up to 51 per cent FDI in multi-brand segment with riders while giving a go-ahead to up to 100 per cent FDI in single-brand as well as in the wholesale business. Also, no FDI was allowed in e-commerce activities while the online marketplace firms were kept out of the purview of any rules back then. Once the DIPP proposal is accepted and new guidelines and norms are out, the wider expectations are that this will help sort out most of the current ambiguities and legal tussles.

What Next?

As soon as the DIPP proposal gets a thumbs-up from the Ministry of Finance, detailed guidelines and operating rules are expected to be put up in the public domain for feedback, government sources said. Major online players, including Flipkart, Snapdeal, Amazon.in, Shopclues and Paytm, which are funded by well-known international investors, operate as marketplace firms, thereby by-passing the existing FDI norms, it has been alleged.

It has already been proven by a number of studies and reports that E-commerce is growing at a fast pace in India. In 2015, the market had risen from $5 billion to $8 billion. A Goldman Sachs report has projected that e-commerce in India could breach the $100-billion mark by 2020. Therefore, all eyes will be on the Finance Ministry and the Budget speech of Finance Ministry Arun Jaitley on February 29 where he may provide the much-needed clarity on this matter.