What exactly happened
On Tuesday 29 March, the Indian government allowed 100% foreign direct investment (FDI) in online retail of goods and services. This can only be availed by companies utilising the “marketplace model” to establish e-commerce businesses functioning in India. The new law will encourage overseas investments in e-commerce in India, which already makes up a large proportion of the FDI coming into the country.
On the other side, the government also announced new guidelines that may put a damper on the discount wars that have been drumming up so much business in the e-commerce arena. The new guidelines now restrict marketplaces from providing discounts and limiting total revenues from a group company or single vendor at 25%.
Terms like marketplace model and inventory model are used very commonly when discussing e-commerce, so what exactly do they mean?
What’s a marketplace model?
A market place model can be defined as establishing an IT stage and assisting as an intermediary amongst a buyer and seller. A marketplace model is for platforms that permit a large split base of consumers and merchants to determine value and execute with each another in an atmosphere that is well-organized, clear and trustworthy. Examples of the type of business include Flipkart, Snapdeal, ShopClues and Paytm.
What’s an inventory based model?
An inventory-based model is where the e-commerce business possesses the goods and services, and sells directly to customers. In an inventory based model, the business possessing the website controls inventory of the products it sells. The company has the ability to determine the selling price as it holds the inventory on hand and an example of this type of business is Amazon in the USA.
Highlights of FDI changes
- FDI is allowed only in companies following the marketplace model and not the inventory based model.
- Group companies or sellers on a marketplace cannot contribute more than 25% of the sales generated on the site.
- Warranties and after-sales service will be the responsibility of the vendor and not the marketplace companies.
- E-commerce companies should provide a platform and play the role of supporters of the marketplace.
- E-commerce companies utilizing a marketplace should not directly or indirectly influence the sale price of goods and services and shall maintain a level playing field.
What does all this really mean?
Well basically the new laws are designed to bring competition back in line for the traditional bricks and mortar shops that have been losing out over the last few years. However, there is a flip side as huge multinationals are now free to setup shop in India. Initiatives such as Make in India by Narendra Modi will also be affected by these new regulations.
“An explicit position from the government on where it stood with reference to e-commerce has been long overdue. In that sense, it is good that some clarity has been provided,”
said Vivek Gupta, partner, BMR Advisors, pointing out that close to $10 billion in funding has been committed to the sector.
“The government had very little elbow room to really state a policy position. And hence, it has chosen to bless the marketplace model with some safeguards that the marketplace should not act like the retailer,” he added.
What we can do for you
We understand that new laws and regulations especially those dealing with FDI and investments can be confusing and even costly if not considered precisely. At QX Corporate Advisors we help with the entire business setup process. We also ensure that all permissions required by regulatory bodies are attained as quickly as possible.
We can provide customised services for business entity setup, approvals, legislative registrations and all of their post registration compliances. So if the e-commerce or retail sector is of interest to you at this exciting time of investment, then please speak to us.
If you’ve been thinking about entering the Indian market or have any questions about India market entry strategy email us on firstname.lastname@example.org or call us on 0845 838 2672.