Almost 10 years after e-commerce started in a big way, the National Democratic Alliance government on Tuesday allowed 100 per cent foreign direct investment (FDI) in e-commerce marketplaces.
Though it has been introduced with a few riders, the reform comes just ahead of Chinese major Alibaba's proposed entry into the country. It also coincides with a recent markdown of valuation of e-commerce companies.
Some of the prominent e-commerce marketplace players in India are Flipkart, Snapdeal, ShopClues and Paytm - all funded by marquee foreign investors. American major Amazon, the biggest rival for Flipkart, too, entered India as a fully-owned online marketplace player two years ago.
The sector has got an estimated $10 billion (Rs 65,000 crore) of foreign investment since it began in a big way 10 years ago. In 2015, around $5 billion (Rs 32,500 crore) of foreign funds were raised by e-commerce companies. Even now, no FDI is allowed in inventory-led online businesses that companies such as Amazon have in the US.
Till now, policy guidelines had stated that no FDI was permitted in e-commerce.
While liberalising e-commerce, the Department of Industrial Policy & Promotion (DIPP) has introduced conditions to ensure that platform owners do not turn sellers. Some of the conditions are that sales cannot exceed 25 per cent for any vendor, marketplace players or their group companies cannot sell, guarantee and warranty must be the sole responsibilities of the sellers, and platform owners cannot influence pricing of products so that there's a level-playing field.
International consultants and analysts claim that the government's move will bring in greater foreign investment into a sector that is set to grow from $16 billion to $70 billion by 2020 (excluding travel). But, domestic traders' body Confederation of All India Traders (CAIT) has hit out at the government, calling it a U-turn in policy that will permit backdoor entry to global players.
International players as well as Indian entrepreneurs have exploited the grey area in the policy till now, thereby running online operations with dollar funds from marquee investors.
The conditions that have been introduced with FDI in marketplace are being seen as tough by some. According to Paresh Parekh, tax partner, retail & consumer products, EY, certain new conditions regarding limit on single vendor sales through marketplace could impact certain existing players.
Also, Aamir Jariwala, secretary, E-commerce Coalition, said, "Unnecessary restrictions on the number of sellers and sole responsibility on them for warranty and guarantee will throttle the growth of the industry."