E-commerce rules do not allow foreign investment in multi-brand retail: DIPP

The FDI rules for e-commerce have not allowed foreign investment in the inventory-based model or multi-brand retailing, the Department of Industrial Policy and Promotion (DIPP) .

It also stressed that the provisions are also not against the interest of consumers, noting that only fair, competitive and transparent business practices would be beneficial for buyers.

These clarifications have come against the backdrop of new provisions announced by the DIPP related to FDI in e-commerce sector last month.

Background:

E-commerce companies can operate under two different models in India.

The first is the marketplace model where the e-commerce firm simply acts as a platform that connects buyers and sellers. FDI is allowed in e-commerce companies in this model.

The second model is inventory-based where the inventory of goods sold on the portal is owned or controlled by the e-commerce company. FDI is not allowed under this model.

What has been happening is that large e-commerce companies such as Amazon and Flipkart, while not owning inventory themselves, have been providing a platform for their group companies such as CloudTail and WS Retail respectively.

Some see this as skewing the playing field, especially if these vendors enjoyed special incentives from the e-commerce firm, over others. These controlled or owned vendors may then be able to offer discounts to customers that competitors may not be able to match.

The thrust of the DIPP policy is directed at protecting small vendors on e-commerce websites. It seeks to ensure small players selling on the portals are not discriminated against in favor of vendors in which e-commerce companies have a stake.

The new set up will ensure a level playing field for all vendors looking to sell on the e-commerce portals. Smaller marketplaces that do not have a stake in any vendors will also be able to now compete with the big daddies.

The small traders were complaining that deep discounts offered by the likes of Amazon and Flipkart are driving them out of business. The new norms aim to tackle the anti-competitive behavior by e-commerce entities and to ensure that there is no wrong subsidization and the marketplace remains neutral to all vendors.

The main players to be affected will be group companies and affiliates of the biggest e-commerce platforms, Amazon and Flipkart.

The provision that bars companies — in which e-commerce firms have a stake — from selling on their portals will hurt start-ups as well since many of these will be barred from selling due to minor equity stakes being held by the e-commerce companies.

Small vendors will not be as affected because most of them do not purchase more than 25% of their inventory from a single source and so they will be allowed to sell their items on the e-commerce platforms.

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