Permitting FDI in E-com in India? The Big Debate

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Permitting FDI in E-com in India? The Big Debate

Nirmol Aggarwal | March 2014

INTRODUCTION

The Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry had floated a “Discussion paper on E-commerce in India” (“E-com Paper”). The said paper deliberates upon and tries to create consensus (through vide consultation) on the notion viz. whether Foreign Direct Investment (FDI) should be permitted in E-commerce in India.

BRIEF PRELIMINARY DISCUSSION

Before going through the E-com paper, it is advisable to understand the concepts of ‘FDI’ (foreign direct investment) and ‘ecommerce’ briefly.

FOREIGN DIRECT INVESTMENT (FDI)

Definition

As per Barron’s Dictionary of Finance and Investment Terms (7th ed.), FDI means: “Investment in businesses by foreign citizens; usually involves majority stock ownership of the enterprise”.

FDI is guided by the rules and policies laid down by the Reserve Bank of India and the Ministry of Commerce and Industry, vide its Master Circular on FDI and press notes respectively.

Why do we need FDI for anything at the first place?

Foreign direct investment not only means funding for an entity or bringing valuable foreign exchange into the country, it also shows the trust of the foreign intellectual/ business / investors (belonging to a different legal and financial system) upon the entrepreneurial capability of an Indian entity, the confidence upon the Indian Legal system and the reliability of Indian financial fundamentals. From the target perspective, it also means strategic alliance and a ready pool of experienced professionals to help take the enterprise / industry to the next level. True that FDI is not only about principles, fundamentals and professional expertise, it is ultimately about ‘money’, but in the course of an FDI exercise, a nation gets support for an under-developed sector which has a potential to excel, create employment opportunity and increase its GDP, while the foreign investor gets the advantage of rapid growth rate on its investments.

In today’s excessively competitive world where nations complete for their share of investment, it is important that all investment incentives are explored and promoted with a caution of fundamental safeguard and this appears to be the focus of the Ecom Paper, which is undoubtedly a step and a thought in the right direction.

WHAT THE ECOM PAPER CONTAINS (A BRIEF SUMMARY)

SOME BASICS FACTS:

E-commerce means sale or purchase of goods and services conducted over network of computers or TV channels by methods specifically designed for the purpose. Even though goods and services are ordered electronically, payments or delivery of goods and services need not be conducted online. E-commerce transaction can be between businesses, households, individuals, governments and other public or private organizations.

There are two models of e-commerce viz.:

“Market Place” model: It works like exchange for buyers and sellers which provides a platform for business transactions between buyers and sellers to take place and in return, earns commission from sellers of goods/services. Ownership of the inventory is with number of enterprises.
“Inventory-based model: In this model, ownership of goods and services and market place vests with the same entity. This model engages in e-commerce directly

Further, there are two forms of transactions in e-commerce:

B2B (Business to Business) – here ecommerce happens between businesses such as between a manufacturer and a wholesaler or between a wholesaler and a retailer.
B2C (Business to Consumer) — here sale of goods and services occurs between the business and the end consumer.

Although B2C e-commerce receives a lot of attention, B2B transactions far exceed B2C transactions.

STATISTICS

The Ecom paper lists out some interesting statistics:

Global As per the World Trade Organisation report, global B2B transactions comprise 90% of all e-commerce. According to USA-based International Data Corporation (IDC), it is estimated that globally (i) B2B commerce, amounted to US$12.4 trillion and (ii) B2C commerce amounted to US$ 1.2 trillion, at the end of 2012. According to Interactive Media in Retail Group, U.K (IMRG), Global business-to-consumer e-commerce sales will pass the US$ 1,250 billion mark by 2013.
Emerging economies India, the world’s second most populous country at 1.2 billion, does not make the Top 30 countries in the global e-commerce index, where India falls behind not only the US, China and Australia in terms of Internet density, but also countries like Sri Lanka and Pakistan. Both Sri Lanka and Pakistan have an Internet penetration of 15 per cent. Statistics show that consumers in the developing markets are fast adopting behaviours similar to those in more developed countries in relation to acceptance of e-commerce as the mode of transacting business.
India According to Report of Digital–Commerce, IAMAI-IMRB (2013), e-commerce industry in India has witnessed a growth of US$ 3.8 billion in the year 2009 to US$ 9.5 billion in 2012 and by 2013, the market is expected to reach US$12.6 billion, showing year to year growth of 34%. Industry surveys suggest that e-commerce industry in India is expected to contribute around 4 per cent to the GDP by 2020. In comparison, according to a NASSCOM report, by 2020, the IT-BPO industry is expected to account for 10% of India’s GDP. Indian e-commerce industry is characterized by “Market Place’’ model. It allows large number of manufacturers/ traders especially MSMEs to advertise their products on the “Market Place” and benefit from increased turnover.

Further, the growing e-commerce industry can have a positive spillover effect on other ancillary and associated industries such as logistics, online advertising, media and IT/ITES

Currently, the inventory-based consumer ecommerce model alone provides direct employment to approximately 40,000 people and is estimated to create 1 million direct and another 0.5 million indirect jobs by 2020. Low entry barriers have attracted many young and enterprising individuals to try their hand at entrepreneurship. A significant 63% of e-commerce ventures have been started by first time entrepreneurs.

Although many factors support the growth of e-commerce in India, the fledgling industry is faced with significant hurdles with respect to infrastructure, governance and regulation. High dropout rates of 25-30 per cent on payment gateways, consumer trust deficit and slow adoption of online payments are compelling e-commerce companies to rely on costlier payment methods such as Cash on Delivery (COD).

SOME LAWS AND REGULATIONS DIRECTED TOWARDS E-COMMERCE IN INDIA

To begin with, all laws that are applicable to the brick and mortar business apply mutatis mutandis to the e-commerce as well, with necessary modification, wherever applicable. The current FDI policy permits up to 100% investment, under theautomatic route in B2B “e-commerce activities”. Similarly, Information Technology Act, 2000, facilitates ecommerce by providing legal recognition for transactions carried out by means of electronic data interchange and other means of electronic communication, commonly referred to as “electronic commerce”. Further, online shopping in India also involves compliance with the banking and financial norms applicable in India. For instance, if PayPal has to allow online payments receipt and disbursements for its existing or proposed e-commerce activities, it has to take a license from the Reserve Bank of India (RBI) in this regard.

However, more laws and regulations specifically directed towards e commerce are required to facilitate trust of the end consumer in the online space, including setting an e-commerce regulator (in the lines of TRAI) which would not only lay down the guidelines for the businesses to follow, but also prescribe standard to adhere to and a forum to report violation so as to organize this sector in lines with the brick and mortar sector. Probably some of the gaps and errors which exist in the real world businesses today, may also be plugged and addressed in an online environment, facilitating a fair playing field for business and a healthy competition to the benefit of the end consumer.

ADVANTAGES OF FDI IN B2C E-COMMERCE

Some of the advantages of FDI in the sector includes providing:Boost to the infrastructural development, impetus to manufacturing sector, more efficient supply chain management, adopting best global business practices, increased outreach, traceability and transparency, reduced costs, improved customer service

DISADVANTAGES OF FDI IN B2C E-COMMERCE

Similarly some of the apprehensions around permitting FDI in the sector includes, will work against the spirit of FDI policy in Multi Brand Retail Trade; Indian market is not yet ready for opening up e-retail space to foreign investors; because of scale of economic operations, e-commerce players in the inventory based model will have more bargaining power than standalone traders and will resort to predatory pricing; the infrastructure created by major e-commerce players will be captive and government will not be able to achieve its objective of creating back end infrastructure; Indian e-commerce market is at a nascent stage of development.

With FDI in e-commerce, global players will have adverse impact on this domestic industry. It will lead to monopolies in e-commerce, manufacturing, logistics and retail sector; Inventory based e-commerce competes directly with MSMEs. Indiane-commerce B2C is growing in an ecosystem with Indian owned/led companies offering open marketplace models which provide a technology platform to help MSME reach across India and even globally; MNCs may dump their cheaper products in the market causing a negative impact on the Indian manufacturing sector in general and to MSMEs in particular; Small time businesses/ kirana stores remain the largest source of employment in the country. Opening of B2C e-commerce on inventory based model is likely to seriously impact these shopkeepers leading to large scale unemployment.

CONCLUSION

Though the Ecom paper is a step in the right direction with much required clarity that it is the need of the hour, to explore developing this sector (which has the potential of becoming the undercurrent of the future economic development and will acquire essential role in the way businesses are done and citizens lifestyle pattern of the future), it goes down as an unsung hero due to over generalization.

When there is a separate discussion on various segments of the industry viz. media, retail, manufacturing, services, entertainment, ancillary and supporting sectors etc., with respect to the traditional brick and mortar economy for FDI purpose in India, why does this Ecom paper revolves so much around (and highlights the negativity of) Multi brand Retail Sector (MBRS) alone (which has also been opened for FDI in any case). The opening of the MBRS for FDI has been a standalone discussion for long and thus the same should not be mixed with the discussion on FDI in e-commerce. It is important to understand that the entire e-commerce industry in India is struggling due to absence of proper funding avenues in the country and is in desperate need of sources of funds. To conclude we can only say, ‘well begun is half done’.

About Author

Nirmol Aggarwal

Nirmol is a lawyer at the Supreme Court of India.