Amidst continuing uncertainties of the policy environment for foreign direct investment [FDI] in multi-brand retail [MBR], a flurry of concerns have been raised by stakeholders especially with regard to the role of MNCs such as Amazon/Flipkart which have increased their presence in India particularly in the e-commerce space.
The retailers associations [those representing the ‘mom-and-pop’ stores] have complained that they are indulging in predatory pricing – a euphemism for selling at rates substantially below cost of production/purchase and distribution – and funding the resultant loss from the dollars brought in from their global parent. This will not only threaten the survival of the street corner shops but even hit the consumers in the long-run as having captured a major slice of the market, MNCs would then, jack up the prices.
The domestic companies in the organized retail too are facing the heat from these e-commerce giants. Although, under a policy announced in 2012, 51% FDI was allowed in MBR in the offline segment [commonly known as ‘brick and mortar’], the caveats viz. minimum investment of US$ 100 million, 30% sourcing from local small enterprises, state approval etc has made it a virtual non-starter.
The global majors viz. Amazon/Flipkart are also under attack from government agencies. The Enforcement Directorate [ED] is currently investigating charges of violating the Foreign Exchange Management Act [FEMA]. In this regard, Delhi High Court [DHC] is also hearing a public interest litigation [PIL].
To address these concerns, a Task Force under Rita Teotia then, commerce secretary had recommended measures viz. capping of discounts, a sun-set clause or specifying a date when the discounts will end and setting up of a regulator to enforce provisions of the policy under which 100% FDI was allowed in ‘market-place’ model for e-commerce – as contained in Press Note 3 [2016-17]. It also mooted a dedicated cell in ED to investigate violations.
An entity working on ‘market-place’ model offers a platform to sellers and buyers to conduct transactions. It acts as a facilitator by offering them services such as booking order, raising invoice, arranging delivery, collecting payment etc. It can’t own stocks and can’t sell directly to the consumer [B2C]. 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.
For an entity owning stocks and undertaking direct selling to the consumers [‘inventory’ model], FDI is prohibited.
It is paradoxical that despite the guidelines not permitting discount by the market-place entity, how such heavy discounts are being given. The likes of Amazon/Flipkart argue these are given by sellers – not by them. This is bizarre! A seller can give discount only out of his margin which can’t be more than 10-15%. How will he survive if he starts giving a hefty discount of say 50% plus?
Actually, the discounts are funded by market-place entities. They have an ingenious architecture in place to make it happen in a manner that it does not play foul of the rules. So, the foreign major appoints entities fully owned by it as wholesalers/distributors. The wholesalers buy in bulk from the brand owners/manufacturers and sell to vendors at a discounted price who in turn, sell the stuff on the online market place owned by the foreign major.
Who are these vendors on whom the 100% subsidiaries of the foreign major [read: wholesalers] shower so much benevolence? Are they related or unrelated entities? Are they merely proxies?
A vendor/seller normally carries out all functions viz. sourcing, purchase, handling, stocking, distribution etc eventually leading to sale to the consumer. In this case however, all these functions are performed by the foreign major and its subsidiaries. The so called vendor has no value addition to make yet, he is a very crucial person in the whole architecture. He is the one who is shown as ‘owning the stock’ albeit for documentation/records.
The owner of the market-place or its subsidiary/wholesaler can’t show itself in this role [read: owner] as then this will be deemed as inventory model wherein, the entity undertakes direct sale to the customer [B2C] and FDI is prohibited. So, it engages with what one may refer to a ‘proxy sellers’ to ensure compliance with the rules.
The rules bar FDI in direct selling. Yet, ingenious bureaucrats have crafted these to ensure that 100% FDI comes by camouflaging this under a fancy nomenclature ‘market place’. The flaw lies in its definition which brings under it almost every thing that a seller does. On the other hand, the so called ‘inventory’ model is a non-entity.
Having allowed them [Amazon/Flipkart] in Indian retail [albeit through the backdoor] and indulge in predatory pricing/deep discount with an aim of increasing their market dominance, for government now to argue that they are taking steps to regulate e-commerce, rein in discounts or check money laundering if any, is an eyewash. How will it check for discounts on market place when there is none?
The Competition Commission of India [CCI] while clearing the acquisition of Flipkart by Walmart had pointed out that a few vendors account for most of the revenue on former’s market-place. They were also getting huge discount from the wholesalers 100% owned by none other than Flipkart – owner of the market place. But, this finding won’t be of any use establishing any violation of the law as the discounts are not offered on the platform.
The government should put a stop to posturing. It should allow 100% FDI in retail without any riders. All artificial distinctions such as market place versus direct selling; online versus offline; food versus non-food etc should go. This will create level playing field for all stakeholders and market dynamics will address concerns of predatory pricing and market dominance, if any.