Resolving the Issues Arising Out of FDI Norms Governing E-Commerce Sector in India

Introduction:

Among its stakeholders, India has issued a draught national policy document on e-commerce. It addresses a wide variety of e-commerce concerns, including data localization, small player level playing field, deep discount prohibition, and customer security. Among its partners, it began a discussion and faced resistance from different agencies. Government agencies that were proposed to enact some of the legislation clauses that have raised questions and the Office of the Prime Minister had to interfere. Lastly, within 15 days of its circulation, the government announced the modification of the draught policy. In the context of the current situation of the industry, this article aims to gauge the needs for formulating the proposal. It also discusses several of the policy’s primary requirements and recommends the path forward.

Background

India is one of the world’s largest and rapidly growing e-commerce markets. In 2016, the industry’s overall size was estimated to be US$ 14.5 billion and is projected to rise to US$ 80 billion by 2020 (Choudhury 2018). During 2017, India’s e-commerce industry reported a growth rate of 24.08 per cent and a total revenue volume of US$ 20.05 million. Out of the overall retail trade in India, the e-commerce sector’s share was 4.2 per cent in 2017 and it is projected to hit 5 per cent by 2020. Investment from diverse quarters has attracted these successful results. In this market, almost all the big domestic corporate giants such as Tata, Reliance, and Birla have forayed. To get a piece of the market, the world’s leading internet retailers like Amazon and Alibaba have also invested. It is probably the scale and growing anticipation that prompted Walmart, the world’s largest supermarket, to make its biggest purchase through Flipkart in India. The sale of Walmart’s 77 per cent stake in the US$ 16 billion Indian e-commerce company Flipkart is the world’s most massive takeover by an e-commerce company so far.

The sector’s impressive growth trend is fueled by rising smartphone users, higher internet penetration rates, increasing credit card use, and a huge young population in India. This growth is also due to government policies promoting digital payments and building infrastructure to sustain the digital economy through different schemes.

All these changes mentioned above have taken place in an atmosphere where the regulation that controls the sector is not explicit. India also needs to finalize a detailed strategy for this sector, even after hitting a revenue target of US$ 20 million and obtaining the world’s highest investment in the market. Currently, various national laws such as the Information Technology Act, 2000, Competition Act, 2002, Unified Foreign Direct Investment ( FDI) regulation, etc. govern this field, etc. The first effort by India to devise a national e-commerce policy can be traced back to 2014 when the Department of Industrial Policy and Promotion ( DIPP) released a discussion paper asking stakeholders for suggestions on whether or not to include FDI in the retail e-commerce market. The decision on the same issue, however, has not yet been made public. As the input was sought only concerning the sector’s FDI, it was not an inclusive effort to frame a strategy to control the whole industry. In 2016, DIPP again attempted to clarify the industry by releasing a press note (DIPP, 2016). Since then, until April 2018, when the government agreed to set up a think tank to prepare a national e-commerce system, little has happened in the policy arena of this field.

What Contributed to the Preparation of a National E-Commerce System for India?

The Indian e-commerce sector is also facing a range of challenges, along with promising growth. Indian e-commerce businesses reportedly violated current market regulation, FDI standards, the Foreign Exchange Management Act (FEMA), tax laws, etc. Many cases against most of the major players in this sector have been reported. In November 2015, the Delhi High Court ordered the government to probe 21 e-commerce websites for alleged FDI legislation abuses. In 2012, a related lawsuit against Flipkart was examined by the Regulatory Directorate. In 2014, similar cases against Amazon India were also reported. Claims have been filed against companies by the Competition Commission of India ( CCI) for supposed misuse of their power by indulging in unjust and discriminatory activities. Karnataka State Government allegations against Indian e-commerce firms for allegedly cheating Value Added Tax ( VAT) in 2014 Two retail trade bodies have also claimed that the new retail policy of the government does not encourage e-commerce firms to sell directly to consumers; however, these firms are now selling to consumers in the garb of the marketplace model, thereby breaching rules

There are several challenges that the Indian e-commerce market faces abroad, apart from these domestic challenges. At the latest World Trade Organization (WTO) Ministerial Conference, held in December 2017, the Indian authorities were unprepared to discuss rules promoting cross-border e-commerce. The big worry for India emerged when a joint statement was released by 71 countries led by the US, China, and Japan announcing that they would begin an exploratory study to examine current FDI regulations to get an in-depth understanding of potential WTO agreements on trade-related e-commerce aspects. India   maintained that it was not ready for any such multilateral laws, as the e-commerce space in the country was still evolving; the discrepancy on crucial issues within different branches of the government, such as data localization and source code, were the key reasons for the reluctance

In other multilateral forums where India is a member, such as the Regional Comprehensive Economic Partnership ( RCEP) and the Comprehensive Agreement on Economic Cooperation (CECA), e-commerce is also addressed directlyThe Indian-Singapore CEPA entered into force in 2005 and is undergoing its second review. A separate chapter on e-commerce in the agreement is likely to be affirmed.

In April 2018, under the chairmanship of Mr Suresh Prabhu, Minister of Commerce and Industry, India resolved the problem by setting up a think-tank to devise a holistic national policy for the e-commerce market, taking account of the issues from a domestic and foreign viewpoint. On 30 July 2018, the think-tank circulated its first draught report to its members.

What’s Involved in the Policy?

The draught report was prepared to allow stakeholders to take advantage of the possibilities emerging from the total digitalization of the domestic and global economy. The draught report aims to define measures to improve the regulatory regime to protect the customer and promote the e-commerce drive for ‘Digital India’1. The draught further recommends the requirements set out in it to different regulatory agencies. It points out the conditions as follows:   

Within two years, e-commerce firms can avoid giving discounts. Up to 49% of FDI would be authorized in the e-commerce inventory form. To resolve numerous concerns relating to e-commerce companies, an independent regulator will be set up. To examine mergers and acquisitions in the industry, regulations of the CCI may be amended. It would be illegal to buy branded products in bulk from similar agencies.

Both data obtained by e-commerce businesses, search engines for social media platforms, and the Internet of Things will be mandatory in India. Recommendations from the Sri Krishna commission on data localization will be followed.

From the points mentioned earlier, it can be translated that Indian policymakers have well researched the sector and have seriously considered keeping in mind all the strengths of the economy to improve the increasing industry. With its large population served by mobile and internet networks, India provides e-commerce companies with great demand. A young population further boosts the potential of e-commerce businesses with technical literacy, rising urbanization, increasing per capita wealth, rising financial inclusion, and an increasing number of credit card consumers. All of these provide Indian companies with a significant opportunity to lead the competition. But once the state funds them, that’s hard to materialize. And a strategy is an excellent opportunity to aid.

A much-needed move is to ban bulk shopping. For a long time, large companies such as Amazon and Flipkart have taken advantage of the loophole in the current policy. The organization of Flipkart by WS retail and the activities of Amazon with Cloudtail were recorded a long time ago (Choudhury 2014). Because of these policies, the government had to explain that gross revenues by a single seller could not exceed 25% of an e-commerce company’s overall revenue (DIPP, 2016). Amazon discovered a workaround right after enforcing the law and set up another business named Appario Retail to sell products on its website. In less than a year of service, Appario Retail posted total revenue of Rs. 7.59 billion.

It is also necessary to control the deep discounts offered by these online giants in the same way as banning bulk shopping. The deals provided by e-commerce companies have greatly influenced the Kirana and mom and pop shops.

India produces a massive amount of data every day, with its large market share and prominent population. A lot of the data is of a critical sort. As in Cambridge Analytica, the unauthorized use of data from Indian people will cost India a lot. The decision to recommend the preservation of data locally is also praiseworthy. To dictate the game on its terms, India has several desirable variables. Along with many other considerations, a vast and increasing demand will enable India to negotiate with multinational firms to store data in India. In this respect, companies such as Xiaomi have already taken a measure by announcing all data from their Indian users to local servers in India.

Voices Against the Policy

The proposed draught legislation presented a few issues among the stakeholders. The Confederation of All India Traders (CAIT) is one such issue, protesting against having 49 per cent of international investment in the e-commerce inventory model. Traders have accused e-commerce businesses of breaching expectations by providing extreme discounts and marketing merchandise directly to consumers. Companies such as Amazon and Facebook reject the mandatory provision of information storage in India.

Government officials, who were assigned to enforce separate laws and faced the fear of infringement of their territory, posed another opposition to the draught policy. This led to the Office of the Prime Minister having a meeting with officials from various departments. An updated draught policy was released on 11 August 2018 to resolve the issues posed by government stakeholders.

Remedying the Mischief under the FDI Norms

1.  To assess whether the e-commerce company is adopting a marketplace-based model or an inventory-based model, re-introduce the 25 per cent revenue threshold.
2. Clarification of the meaning of ‘equity participation’ is required under Regulation 16(B), SL. 15.2.3(i). No. It is also necessary to define a minimum requirement for such equity participation.
3. To allow customers to continue to reap the advantages of cashback, the clause banning exclusive offers should be eliminated.
4. A ban on mergers that would further consolidate their vertical integration might prove useful for e-commerce companies that have achieved a certain degree of supremacy. In recognizing that integration across multiple business lines gives rise to a situation in which the e-commerce platform can use its infrastructure to the detriment of rivals who rely on the same infrastructure, it would be a step forward.

Conclusion

Diverse concerns such as foreign trade, domestic trade, antitrust policies, customer security, information technology, etc. are covered through e-commerce. It is essential to govern it, taking into account the needs of both entrepreneurs and customers, as a growing industry of tremendous participation from both domestic and foreign players. It should foster a conducive community and a level playing field. Policymakers should be mindful of forming a competitive domestic market as well. To model India’s role in both domestic and foreign or multilateral forums, a detailed strategy is of paramount importance.

References:

• https://dipp.gov.in/sites/default/files/DraftNational_e-commerce_Policy_23February2019.pdf
• https://indialawjournal.org/resolving-the-issues-arising-out-of-FDI-norms-governing-e-commerce-sector-in-india.php
• https://corporate.cyrilamarchandblogs.com/2020/02/indias-foreign-investment-policy-on-e-commerce-retail/