The Delhi High Court (DHC) is hearing the plea of Retailers Association of India [RAI] and All India Footwear Manufacturers & Retailers Association [AIFMRA] regarding alleged violation of rules relating to foreign direct investment [FDI] in multi-brand retail by e-commerce companies. The writ petitions were filed by the two associations in May, 2014 and August, 2014 respectively.
In its affidavit submitted to DHC, the department of industrial policy and promotion [DIPP] has argued that its job is to formulate policy and has nothing to do with its implementation. It added that it has already laid down a ‘transparent’ and ‘predictable’ policy which permits 100% FDI in B2B [business-to-business] transactions in e-commerce but prohibits in B2C [business-to-customer]. Furthermore, it does not recognize the concept of “market place” which all major e-commerce companies viz., Flipkart, Snapdeal, Amazon etc are projecting as their business model.
DIPP is the nodal authority for all FDI related issues. If, it was so confident that the much touted “market place” concept has no validity under extant dispensation, why did it not communicate in clear terms to the ministry of finance [MOF] to whom the enforcement directorate [ED] – the implementing authority for violations under FEMA [Foreign Exchange Management Act] – reports. Why did it wait till the matter came up in the court?
On the other hand, if, DIPP felt that rules were abundantly clear [requiring no further clarification] then, why did MOF not take cognizance of the violations and issue directions to ED for initiating action against e-commerce companies. This is all the more reprehensible when finance minister basks in the glory of surge in FDI propelled in large measure by inflows in to e-commerce and yet not ascertaining if it is permitted under the policy.
Now, DHC sees prima facie violation of FDI policy by e-commerce companies and has ordered ED to probe 21 of them. If, investigation is meant to authenticate what is already known and even the nodal authority [read DIPP] – author of the policy – has told the court in no ambiguous terms, will this not tantamount to sheer waste of time? Last year, the court had told government to sort out the matter within 4 months but, latter continues to dilly dally.
To understand what an e-commerce company does, let us look at this. The customer registers his/her request for an article on its web portal who then raises the invoice and arranges for its delivery [from its warehouse] at customer’s address. The company also receives consideration, accepts rejections and arranges for refund. In short, it performs all sales related functions and has all the ‘logistics’ wherewithal to support these.
In short, operations of e-commerce companies fall under B2C classification. If, they were to accept this reality and accordingly declare as retailers, they would find themselves on the wrong side of the law. So, they ‘camouflage’ this under so called “market place” model, a euphemism for a providing a platform to sellers and buyers for conducting transactions.
What pushes them in to taking recourse to such un-healthy practice? It is none other government’s unrealistic policy of barring FDI in B2C. The policy goes against the contemporary milieu wherein FDI is badly needed to give a boost to economic activity including in retail segment. Foreign funds are waiting to come and yet if you choke the flow, these will still come albeit in a round-about manner.
Under the extant policy approved by erstwhile UPA dispensation in 2012 and continued by Modi-government, 51% FDI is allowed in multi-brand retail [MBR]. But, several riders such as 30% sourcing from small enterprises, minimum investment of US$ 100 million, prior approval by states etc have virtually shut the door to FDI in MBR. In this backdrop, permitting FDI in e-commerce retail would have been out of sync. So, powers that be ban this as well.
In short, under a highly regressive policy regime, the government has shut the door to FDI in MBR be it in physical format or via e-commerce. Yet, foreign funds continue to pour in to e-commerce albeit illegally. This too will stop under orders from the court sooner than later. Even the money already invested will have to go back. The consequences will be too dastardly to fathom.
At present, the government allows 100% FDI in single-brand retail. Recently, rules were tweaked to permit a foreign company already in to single-brand retail to sell the brand via e-commerce as well [e.g. Ikea will be able to sell its furniture on e-platform]. 100% FDI is also allowed in whole sale cash-and-carry. What an irony, foreign companies in India can sell multi-brand to wholesalers/institutional buyers but not to retailers!
Much of current policy mess is due to unnecessary distinctions/classifications such as ‘single-brand’ and ‘multi-brand’ – a practice unique to India. All over the world, retail is treated as ‘retail’ without any differentiation. Why cannot we follow this practice? Why cannot government allow 100% FDI in MBR, already permitted in single-brand? Why cannot it put in place a uniform policy dispensation?
Once the anomaly with regard to foreign investment in physical segment is removed, the government will have no hitch in letting 100% FDI in e-commerce retail or B2C as well. With this, both retailers and e-tailors will be on a level playing field and can proactively engage in an open and transparent manner with foreign investors [no back door entry].
The government would have ended up providing a “stable” and “attractive” policy environment. Apart from funds already in staying here, there will be unprecedented scope for more FDI. An added bonus will be by way of brick-and-mortar companies withdrawing pending cases in court who can focus more on clearing tens of thousands of cases and delivering justice to common man.
Left to himself and given his reform credentials, Modi would love to bring about these policy changes and leverage them for accelerating inclusive growth. But, he needs his party to lift the brakes.