On April 22, 2020, the California based US Internet giant Facebook announced its decision to buy 9.99% stake in Jio Platforms Limited (JPL) paying more than Rs 43,450 crore. JPL is a 100% subsidiary of Reliance Industries Limited (RIL) and has in its fold a wide spectrum of businesses such as wireless broadband, home broadband, enterprise broadband, narrow-band, internet-of-things businesses, a bouquet of digital applications, e-commerce etc.
This was followed by a flurry of investments with big names such as General Atlantic, Silver Lake, Qualcomm, Intel, Vista, Google etc bringing in cumulative investment of over Rs 100,000 crore taking the total to Rs 150,000 crore. In lieu of this capital infusion, they get aggregate shareholding of 30% or Rs 5000 crore for every 1% thus valuing the company at a whopping Rs 500,000 crore.
Even as foreign investors see value in every segment of the business on this platform, at the centre stage is e-commerce which is being powered by JioMart commerce platform – a unit of JPL. In fact, Facebook has come in primarily with an eye on tapping opportunities in this area and signed a comprehensive agreement with JPL to exploit synergies between the two conglomerates.
The duo intend to offer technology enabled wherewithal to enable consumers access the nearest kirana shop (a euphemism for neighborhood store) and have products delivered at their doorsteps. About 30 million of these stores will be empowered to digitally transact with every customer (over 400 million-strong Indian database of WhatsApp – a 100% subsidiary of Facebook – will come in handy) in their neighborhood. JioMoney – RIL’s payment platform will be integrated into JioMart venture to facilitate hassle-free seamless payment for transactions.
The model operated by Reliance under JioMart is a combination of online and offline retail. Apart from Reliance Retail Limited (RRL) which has thousands of retail stores spread all over India and get hooked on to the Jio platform, it will be serving tens of millions neighborhood stores in a variety of ways including handling, procurement, storage, payment, delivery and so on. Since, all of this will be powered by a digital eco-system, the model is fundamentally online.
From the above, two things are abundantly clear. (i) Reliance Industries is deeply entrenched in Indian retail – already through RRL and now increasing its footprint exponentially through Jio Platform; (ii) it is getting massive injection of foreign direct investment (FDI) of Rs 150,000 crore of which about 30% or Rs 43,450 crore by Facebook goes straight into JioMart commerce platform. This is already done with the anchor investor (read: Facebook) having got necessary approval from the concerned authorities. But, this is out of sync with the extant policy in regard to FDI in retail.
For the purpose of FDI, unlike the international practice where retail is treated as a single homogeneous sector without any distinction, Indian government has divided retail in to several classes. In India, we have single-brand retail (SBR) and multi-brand retail (MBR). Even as within SBR, there are three sub-categories, here we deal with MBR or retail – as it is known in common parlance.
Within MBR, there is the ‘physical’ format or offline which takes two forms (i) the euphoric ‘mom-and-pop’ store (also nicknamed neighborhood store) and (ii) organized retail. Then, we have ‘online’ format which has two sub-categories viz., ‘market-place’ model and ‘inventory’ based model.
In MBR, as per a policy approved by the then UPA – dispensation in 2012, 51% FDI is allowed but with a plethora of riders such as 30% local sourcing, minimum investment of US$ 100 million and prior approval of state where retail shop is to be set up. In 2016-17, 100% FDI in food retail was allowed subject to the foreign retailer selling items which are sourced only from Indian farmers and processed locally. Besides, 25% of investment should be in agri-infrastructure viz., irrigation, farm machinery/implements etc.
Under the online format, as per guidelines issued in early 2016 (Press Note 3), 100% FDI is allowed under the so called in ‘market-place’ model. The ‘market-place’ is a platform where vendors sell their products to consumers even as its owner merely acts as a facilitator. The market-place owner provides services such as book orders, raise invoice, arrange delivery, accept payments, handle rejections, warehousing etc. But, he can’t undertake ‘direct selling’.
The permission for 100% FDI in market-place is subject to two main riders viz. ‘the entity cannot permit more than 25 per cent of total sales on its platform from one vendor or its group companies. Further, it can’t directly or indirectly influence the sale price.’ Sans any specification as to ‘who the vendor is’, a firm linked to marketplace [either its subsidiary or a JV with an Indian company] is eligible. In other words, each such entity could control up to 25% of sales on the platform.
Thus, contrary to the real intent of the policy which disallowed marketplace owner from direct selling to individual consumers, the fine print permitted them – albeit by its subsidiary or JV. This is precisely what e-commerce majors such as Amazon and Flipkart/Walmart have been doing even though, they came in as marketplace operators. They are operating as direct sellers, controlling inventory, giving discounts etc.
A clarification to Press Note 3 issued on December 26, 2018 has not materially altered the position on ground zero. It says ‘the owner of market-place or its subsidiary or its JV with Indian company can’t have ownership of the seller’. Further, ‘a seller/firm on the platform can’t source more than 25% of its inventory from a firm connected with the latter’. The market-place owner can get around both (i) by having less than 50% shareholding in the seller firm and argue, he has no control [albeit majority] over the latter; (ii) its wholesale arm continuing supplies to the seller but within the 25% threshold.
Clearly, the e-commerce giants have violated the spirit behind the policy on FDI in market-place; they are also acting as dominant sellers on the platform giving little space to millions of small vendors for whose benefit this unique policy dispensation was meant. It is ironical that disingenuous bureaucrats have allowed them to do so by suitably crafting policy architecture.
The small vendors through their umbrella organizations such as All India Online Vendors Association (AIOVA), Retailers Association of India (RAI), Delhi Vyapar Mahasangh [DVM] etc have petitioned the government as well as judicial authorities at various levels seeking action against Amazon/Flipkart for violation of FDI norms and indulging in unfair practices but failed. The sole reason for this is that the courts go by the fine print which suits these giants.
Unlike the marketplaces of foreign e-commerce majors, JioMart commerce platform floated by Reliance Industries holds potential of giving a boost to the small vendors, but even this may not gel with the extant policy framework. The thrust of the policy continues to be on ‘complete prohibition on FDI in the inventory model’; yet JioMart has received investment from Facebook – a foreign company.
Like Amazon et al, Reliance/Facebook may get around by citing that foreign shareholding in the seller firm is <50% or a wholesaler linked to JioMart owner (read: Reliance/Facebook) will keep its supplies to the vendor within the 25% threshold. Or they may carve out a separate entity entirely for ‘food retail’ where 100% FDI is allowed. This way, they would be able to demonstrate that they are not violating the rule book. But, that is not the way forward.
Looking at what is happening on ground zero, it is abundantly clear that Modi – government is keen on permitting FDI in online retail and even in offline retail as amply vindicated by the case of RIL/RRL which has got foreign investment (albeit without any riders). If, that be so, then why should it be allowed to happen in a vague and convoluted manner? Why should the policy not be clear-cut and transparent? Why should FDI not be allowed from the ‘front door’?
The government should shun the marketplace model. It should allow 100% FDI in retail in both online and offline without any riders (the special categories such as 100% FDI in food retail, 100% FDI in SBR etc will have to go). This will level the playing field for all viz. online versus offline, food retail vs non-food, marketplace vs inventory etc and eliminate discretion of bureaucrats whose writ is all pervasive when it comes to grant of approval.
It will help small traders by leading to all round development of the infrastructure and offering wide range of choice for sourcing products. They can and will co-exist with big players – both foreign and Indian. It will be pro-consumer in the long-run with many players catering to their needs at competitive/affordable price.
Sans the above policy changes, under business as usual scenario, the consumers will pay heavy price in the medium to long-term as Indian retail will be cartelized by a few players viz. Amazon, Walmart and Facebook/RIL.