India’s industry department will soon define the term marketplace and also elaborate on just what constitutes retail and wholesale trading on such platforms—a move that will decide the future of not just India’s booming e-commerce business and high-profile start-ups, but also that of traditional retailers that have long alleged that many of these marketplaces are actually involved in the retail business.
At stake, apart from an online retail market worth $4.47 billion last year (according to UBS) and estimated to be worth between $48 billion and $60 billion by 2020, are billions of dollars in venture capital funding that have found their way to these marketplaces, defined as websites that connect buyers to sellers, offering services such as warehousing, logistics, and payments. This falls under the definition of so-called B2B or business to business e-commerce. India allows foreign investments in firms engaged in this business, but not in retail firms.
Such funding has allowed companies such as Flipkart and Snapdeal (promoted by Jasper Infotech) to build share by offering substantial discounts on products—often at the expense of traditional retailers. The discounts are actually offered by sellers on the website that are them compensated by the marketplace.
The industry department will soon circulate a draft cabinet note for inter-ministerial consultation ahead of laying down guidelines defining the marketplace model for e-commerce players.
“We are in the process of formulating the guidelines. We will have to take cabinet approval for it,” a government official said speaking under condition of anonymity.
The official said the Department of Industrial Policy and Promotion (DIPP) will also define what will be considered retail (B2C) and wholesale (B2B) trading within the marketplace model.
The official, however, said that there is no proposal being considered on allowing foreign direct investment in retail e-commerce.
“Large e-commerce companies such as Alibaba have grown following the marketplace model,” he said.
There is currently no official definition of marketplace model.
The Retailers Association of India (RAI), mostly representing traditional brick-and-mortar retail stores moved the Delhi high court in May seeking parity between online and offline retailers. The court ordered the Union government to consider its representation within four months. It gave the option to the RAI to seek legal recourse if it is not satisfied with the conclusions of the engagement.
Soon after, commerce and industry minister Nirmala Sitharaman held extensive consultations with online and offline retailers, banks and state industry ministers.
Kumar Rajagopalan, chief executive officer of RAI, told Mint in July that the government should clearly define what constitutes a marketplace. “If FDI is allowed for a player engaged in retail e-commerce, it should also be allowed for brick-and-mortar players. This is all about providing a level playing field,” he said.
Indian laws currently allow 100% foreign investment in marketplaces but none in traditional multi-brand retail and retail e-commerce.
During the consultations, many state industry ministers, including some from states ruled by the Bharatiya Janata Party (BJP) such as Rajasthan and Madhya Pradesh, said they favoured a level-playing field to both e-commerce and multi-brand retailers, and suggested that foreign direct investment be allowed in both.
DIPP asked the states to make written submissions.
The government official quoted earlier said only a few states complied. “We will send another reminder and if they do not reply, we will go ahead with the guidelines,” he added.
Arvind Singhal, chairman of retail consultancy Technopak Advisors, said no country except India makes a distinction between B2B and B2C e-commerce.
“Worldwide there is no government that is trying to redefine e-commerce. And in India, where the biggest stakeholders are consumers, nobody is speaking to them. I apprehend the new e-commerce guidelines may also turn out to be complicated like the policy on foreign direct investment in retail,” he added.
In 2012, the then Congress-led United Progressive Alliance government allowed 51% foreign direct investment in multi-brand retail in some cities, subject to the approval of the state governments. The current BJP-led National Democratic Alliance government is opposed to this, although it has not changed the policy itself. Perhaps because of its opposition, there have been no investment proposals in multi-brand retail. In July, the cabinet allowed all companies including Indian supermarkets, to tap the equity market to raise foreign portfolio investment upto 49% without seeking the finance ministry’s approval.
(This article was first published on livemint.com)