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Don't tinker with FDI e-comm rules

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Don't tinker with FDI e-comm rules

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  • E-comm FDI rules change, once more: Union govt. wants to change the rules governing e-commerce in India, insofar as Foreign Direct Investment (FDI) is concerned, as the draft e-comm policy shows. This issues has remained unresolved for many years now.
  • New proposals: The draft new e-commerce policy says many things.
    1. It targets boosting of exports by e-commerce firms, by treating e-comm exports at par with non e-comm exports, and raising exports by using India Post and Foreign Post Office facilities.
    2. Catching rogue e-comm firms that host pirated content, and putting such rogues into IEE category (Infringing E-Comm Entities) to eliminate counterfeiting
    3. Providing equal and level playing field for all sellers, and restricting biased algorithms that favour some sellers
    4. Compliance with applicable laws (FDI rules take priority)
    5. Ensuring data security 
    6. Promoting offline sellers to go online, etc.
  • The problem areas: One provision says that if e-commerce firms themselves cannot do something directly, then its associates too cannot do that thing indirectly. Who will be called "associates" and "related parties"? It will be a government-determined list. But it cannot be vague and open-ended. 
  • History of this problem: In 2016, 100% FDI in marketplace model in e-commerce sector was allowed. So entities could create the platform, helping buyers and sellers meet online. But the inventory model where an entity owns and trades in goods on its own e-commerce platform, was not opened to FDI. Why? To protect the interest of small storeowners in India.
    1. Hence, an e-commerce entity in India (Flipkart, Amazon etc.) could not sell on its own e-platform (website)
    2. A seller who sold more than 25% of total sales on the e-platform would be restricted
    3. Hence, e-commerce firms were to be pure play marketplace firms, and not inventory-based sellers (on their own marketplaces).
    4. In 2019, new controls tightened the norms, with a "control" definition. An entity would be considered in control over a seller's inventory if that seller bought 25% of goods from either that marketplace entity (Flipkart, Amazon...) or its "group companies". Similarly, equity stakes too were disallowed.
  • Flouting rules: It was known that many marketplace firms were openly breaking this rule, by selling on their own platforms. How? They were following rules in letter, but not in spirit. The govt. now wants to fix this problem.
    1. A "Group Company" in FDI policy meant 2 or more such firms where they can enjoy 26% or more voting rights, or appoint more than half of directors. But such firms enjoyed a technical loophole ("other enterprise not becoming part of the group") to continue selling on their own platform.
    2. This indirect stake-holding provision needed clarification. 
    3. Then, rules covered "downward holding of stake" but not upward! So holding companies of e-commerce entities were excluded. Misuse was possible.
  • Once and for all: The government must clarify all legalities once and for all, and end the uncertainties in market. Investments get hurt. For now, the govt. is stuck, as a literal interpretation could be bad for many e-commerce firms operating in India.
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