Opinion | Time to keep Trojan Horses out of India’s retail sector
The recent updates to the regulations governing FDI in e-commerce will disrupt the existing structures created by some marketplaces
The recent updates to the regulations governing FDI in e-commerce have caused quite a stir. This is not a new piece of regulation but a clarification of an existing policy. The review identifies current transgressions and seeks to stop the continuing violation of the policy. What has changed is not the policy but the measures and hopefully the intent to enforce it.
At the heart of the matter is the fact that FDI-funded online marketplaces are permitted to be only technology platforms, connecting independent sellers and buyers. The e-commerce policy is explicitly clear that marketplaces cannot be sellers and are prohibited from owning or controlling any inventory. None of these are new provisions.
Some marketplaces have set up elaborate mechanisms to circumvent these restrictions. The circumvention starts by marketplaces—through their group entities—buying directly from brands and large manufacturers. These goods are then sold to proxy sellers, who are controlled by the marketplace itself. The marketplace helps by giving higher visibility to such sellers and most buyers end up buying from these sellers. Subsidized logistics, cashbacks through marketplace-owned wallets and selective discounts complete the picture that favours one set of sellers over another.
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Surprising many, the government has chosen to see through all these discrete structures and called them out for what they are—an attempt to engage in the inventory model of e-commerce and sell to consumers directly.
The enforcement of the letter and spirit of an existing policy cannot be termed as “change in policy”. Also surprising is the extreme narrative that terms continuing violations of the policy as market-driven and enforcement of the law of the land as regressive. Maybe it is because they expect the optics of businesses to shrink materially and create a steep learning curve, neither of which would have been factored into the ongoing thesis of investing billions of dollars.
There could be a fair point made on the timing of these updates. These guidelines should have come two years ago. The distortion of the smartphone retail infrastructure through aggressive pursuit of exclusive deals and heavy direct discounting is a striking reminder that the combined flows of technology and FDI can either supplant or supplement India’s fast-growing retail sector.
The recent policy updates will disrupt the existing structures created by some marketplaces in two ways. First, the sellers that have equity ownership by the marketplace or its group companies will no longer be able to sell on the marketplace. Second, sellers will no longer be able to source more than 25% of their purchase from the marketplace or its group companies. This will prohibit marketplaces from making attempts to project inventory operations as independent sellers. It will also restrict the creation of private labels by marketplaces to cordon off high-volume, high-margin areas for themselves.
The other update relates to non-discriminatory access for all vendors to the services provided by the marketplace or its related entities, a move that will enforce an even-handed approach towards all sellers.
The third significant impact is the restriction on marketplaces to insist on exclusive deals. The use of money and reach to crowd out small sellers has been a very destructive strategy that strikes at the core of fair competition. With exclusive deals now gone, more sellers can offer the same product, which is good for both buyers and brands.
The cumulative effect of this will be faster growth for independent online sellers. This will create a deeper selection on pure marketplaces, greater choice for online buyers, more competition among sellers, and better prices for consumers.
The recent measures will help create more enterprises and jobs as micro, small and medium enterprises benefit from the vast potential of digital sales channels. If implemented consciously, these will ensure lasting gains for both buyers and sellers.
The provision in the policy update requiring marketplaces to submit to the Reserve Bank of India (RBI) an annual compliance certificate from their statutory auditors is important for ensuring implementation.
Every nation has a right to frame policies that best suit its economic and social needs. India has done well to gradually open up its economy. FDI is already allowed in B2B, wholesale and single-brand retail and in ancillary sectors like logistics, technology, and payments. The government hasn’t allowed FDI in multi-brand retail with a clear recognition that we need to first create domestic capabilities and allow existing retail channels to adapt to the digital tomorrow. That is exactly why the government chose the marketplace model and these cannot be converted into Trojan Horses for a camouflaged entry into India’s retail sector.
No one is a fan of excessive regulation or heavy-handed regulators. Self-regulation regarding operating guidelines, based on the government’s stated policies, is the ideal way forward for India’s digital commerce sector. This will allow fast and flexible growth, aligned with the evolving needs of buyers, sellers, platform and all other members of the ecosystem. Consistent implementation of soft-touch regulation supported by honest self-regulation will serve Indian e-commerce well in 2019 and beyond.
Kunal Bahl is chief executive officer and co-founder of Snapdeal.
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