E COMMERCE An Insight What is E-Commerce? E-Commerce means buying ans selling of goods and services including digital products over digital and electronic networks. Who is an E-Commerce Entity? It means a company that incorporated under the Companies Act,1956 or the Companies Act 2013 or a foreign company covered under the Companies Act 2013 or an office, branch or agency in India as provided in FEMA 1999, owned or controlled by a person resident outside India and conducting the e- commerce business. Let us study from the image below, the sectors that contribute the most to e-commerce :
Why in news? 100% FDI is permitted through automatic route in the market place model of e-commerce The above development indicates that 100% FDI is not permitted in inventory based model This FDI is permitted only for B2B (Business-to-Business) model and not for B2C (Business-to- Consumer) More about this Circumstances under which FDI is granted here: A manufacturer will be permitted to sell its manufactured products in India through E- Commerce retail A single brand retail entity operating through brick and mortar store is permitted to undertake retail trading through E-Commerce An Indian manufacturer is permitted to sell its own single brand products through E-Commerce retail. Indian manufacturer would be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, at most 30% from Indian manufacturers Conditions levied: E-Commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services The E-Commerce entity providing the marketplace will not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory will render the business into an inventory based model in which FDI is not permitted. An E-Commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or other group companies Post sales, delivery of the goods, satisfaction of the customer, warrantee/ guarantee of the goods and services will be the responsibility of the seller In market based model, payment for sales may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India E-Commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field FDI (Foreign Direct Investment) A Brief FDI means investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Regulations, 2000 The purpose is to supplement domestic capital, technology and skills for accelerating economic growth
There are two routes for investment namely government and automatic. Where under the government route, the approval is required by the government and these are considered by the Foreign Investment Promotion Board (FIPB),under the automatic route on the other hand investment does not require any approval by the government Sectors such as gambling, lottery, manufacture of cigars, chit funds etc. is prohibited Sectors such as Atomic energy, railway operations are not open for private sector investment *Points to note: Levels of Approvals for Cases under Government Route 1. The Minister of Finance who is in-charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs. 2000 crore. 2. The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 2000 crore would be placed for consideration of Cabinet Committee on Economic Affairs (CCEA) 3. The CCEA would also consider the proposals which may be referred to it by the FIPB/the Minister of Finance (in-charge of FIPB) (Source: DIPP) Market Based Model Under this model, an e-commerce entity acts as a facilitator of goods and services by providing an information technology platform to the buyers and sellers Inventory Based Model Under this model, the e-commerce entity owns an inventory of good and services to be sold to the buyers directly
Implications of FDI in E-Commerce Good points: The B2B business model in market place has been officially recognized by the government of India and hence ended much ambiguity in policy The discount wars will end providing some relief to the brick and mortar retailers and provide a level playing field It will allow the traditional brick and mortar sellers to come out of their geographical barriers It will help connect the long chain of demand in India with the long chain of supply Indian offline manufacturers can go online and attract foreign investment now Not so good points: The 25% rule might upset some of the big e-commerce entities and may require the restructuring of their model The offline retailers are afraid that the e-commerce entities may flout rules at the procedural level The fears of predatory pricing after capturing the markets The Brick and mortar retailers are still not allowed for Foreign Investment
There is no foreign investment allowed yet in B to C model, which will affect the small online entrepreneurs and will make them dependent on the large B-B players in the e-commerce market The customers will lose out on the attractive discounts which were offered by these etailers till now however the fears of predatory pricing by the etailers still looms despite the cap on discounts Challenges of the Indian e-commerce industry 1. High competition: There are different players in the same area of business leading to decrease in profitability due to reasons such as aggressive pricing strategies, heavy discounts and offers, free delivery, high commissions to affiliates and vendors during sale period to name a few. These firms are losing billions for attracting customers. 2. Poor logistic & supply chains: E-commerce companies need to maintain the stock to get benefit of reach and the ability to stock more items than physical stores as these are their biggest differentiators. With this benefit also comes the challenge of robust supply chains and logistics networks, which are not comparable and developed to global standards in India. 3. Payments: While offering a wide variety of payment options, Cash on Delivery (CoD) option in India is the most prevalent as customers fear to share information online and do not trust the website for secure payments. Also, the return percentage of orders in CoD is much higher compared to online payments. 4. Trust of the customer: Due to the constraints of quality, colour and texture recognition especially in apparels and luxury products, the customers are not able to trust that what is shown will be delivered. How to approach for the Civil Services Examination General Studies 1: Impact of Britain s economic policy on India (This is to get an idea that FDI is not a new concept) The economic drain theory General Studies 2: Policies of the Government General Studies 3: Foreign Direct Investment Service sector of the economy Make in India Digital India
Key Words: FDI, B to C model, market place model, inventory based model, government route for FDI, automatic route for FDI Links to refer: http://byjus.com/free-ias-prep/fdi-e-commerce-will-benefit http://byjus.com/free-ias-prep/centre-gives-nod-100-fdi-e-commerce-retail Practice Question: What do you understand by government s decision on allowing 100% FDI through market based model only? Analyse its impacts on the Indian economy?