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FDI norms in e-marketplace: Protecting offline retailers

Nitin Potdar

Nitin Potdar, M&A Partner at J. Sagar
Associates

On the face of it, the new notification allowing 100 per cent foreign direct investment (FDI) in e-commerce is a resolute effort to make the online retail marketplace scalable and sustainable in the same breath. By defining a few terms, the notification also claims to have brought the much-needed clarity in e-commerce operations. The reality is strikingly different if not diametrically opposite.

The real purpose of the government notification is more than obvious: To arrest the ‘deep discounts’ extended by online firms that were badly bruising the brick-and-mortar retail companies. There’s no denying that Flipkart, Snapdeal and Amazon, followed by other e-commerce companies, have transformed the dynamics of retail selling in favour of the consumer. This, obviously, impacted offline retail giants, which, till this point, were dictating terms and conditions, apart from pricing, to the vulnerable end-user. No wonder, they were furiously opposing FDI in retail. What they did not anticipate was the inherently democratic and innately disruptive power of technology, which found a greenhouse of unlimited possibilities in retail, that, too, in a country like India.

Exasperated and exhausted by the sudden onslaught, they retorted with some glaringly weak logic, that the ‘deep discounts’ of e-commerce firms didn’t make business sense and were unsustainable beyond a point. Which is why, they urged, the ‘unfair’ pricing tactics needed to be weeded out with immediate effect. Nothing could be more ridiculous. This is akin to saying that video conferencing facilities should be shut down because they are killing airline, hotel and telecom businesses in one stroke, or asking mobile phones to remove in-built cameras because they hurt camera sales.

Technology is invariably disruptive, with the potential to destroy businesses that are either unmindful of the pervading reality or averse to innovation?

A cursory glance at the key points of the new guidelines makes the ‘restrictions’ unthinkable when India is trying to find its own place in the global market:

a. FDI is not allowed in inventory-based model of e-commerce. This may disturb Amazon’s and Flipkart captive seller arrangements, if any.

b. E-commerce marketplace can provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services. However, such entities cannot exercise ownership over the inventory.

c. An e-commerce firm can’t source more than 25 per cent of the sales effected through its marketplace from one vendor or their group companies.

d. Goods /services made available for sale on an online marketplace has to clearly provide the name, address and other contact details of the seller. Strangely, post sales, delivery of goods to the customers and customer satisfaction is not the responsibility of the marketplace e-commerce company, but is that of the actual seller.

e. Most importantly, e-commerce entities with a marketplace model cannot, directly or indirectly, influence the sale price of goods or services and will have to maintain a level playing field.

A reform is hardly a reform with such imposing conditions blocking the evolutionary paths of the supposed beneficiary players at every corner.

The clear message to market participants is: “Use your legal brains to create short cuts and diversions to bypass the maze of restrictions – all we (the government) can offer is a semblance of a level playing field”. Needless to say, we will soon see shell companies mushrooming that would eventually make a mockery of the 25 per cent cap.

I wonder how long our government can continue to succumb to the pressure of industry lobbies and also, how long can any industry survive on short-term tactics aimed at survival and not sustainability.

Why can’t we accept the fact that technology is invariably disruptive, with the potential to destroy businesses that are either unmindful of the pervading reality or averse to innovation? A level-playing field won’t automatically evolve with FDI investments; it demands a democratic playground where every retail stakeholder on the supply side has equal opportunity.

Online retailers should certainly check their advertising spends and predatory tactics to grab market shares, but their contribution in making the consumer spoilt for quality choice can’t ever be overlooked.

The way out is not in resorting to regressive ploys that block doors that are wide open, but in devising and designing innovative business solutions to ensure offline business models are attuned to new technology-based business innovations. These could be in the form of lateral or vertical online-offline collaborations, not only for expanding product portfolios, but also in the crucial areas of manufacturing technology, marketing techniques and customer reach capabilities. Darwin’s law should no longer be read as survival of the fittest but sustainability of the fittest.

The author is partner at law firm J. Sagar Associates.

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