Insights into Editorial: A half-hearted attempt to liberalize e-commerce

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Insights into Editorial: A half-hearted attempt to liberalize e-commerce

01 April 2016

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The decision to allow 100% FDI in e-commerce entities running online marketplaces is a belated yet welcome step by the government. It clears the air a great deal on the norms governing a rapidly expanding part of the economy, and makes de jure what has hitherto been de facto.

Why policy in this regard was necessary?

Billions of dollars have already been committed as investment in the sector, and online shopping is now an established retail habit. The growth potential of the segment has drawn in venture capital and private equity investors in droves, and e-commerce players had exploited the policy ambiguities and loopholes to obtain attractive valuations for their enterprises.

There were also allegations from brick-and-mortar stores that Indian e-commerce companies were flouting existing policy norms to gain an unfair advantage, given that the government does not allow FDI in multi-brand retail companies.

About the latest guidelines:

The latest guidelines make it clear that as long as a business entity acts purely as a marketplace, facilitating online transactions between a seller and a buyer, 100% overseas ownership is allowed in the venture.

  • Safeguards have also been specified from the marketplace operator’s perspective, so that the responsibility for both delivery and quality of the product and related warranties will lie with the seller.
  • Besides, e-commerce firms can provide support services to sellers, including warehousing, logistics, call centres and payment collection.
  • Also, an e-commerce firm will not be permitted to sell more than 25% of total sales from one vendor or its group companies.

How would these guidelines affect foreign-owned e-commerce marketplaces?

  • The imposition of a 25% cap on the value that sales from a single seller and group companies can contribute to overall turnover at the marketplace means some of the largest e-commerce players will have to redraw their business strategies.
  • The unequivocal assertion that any ownership of inventory by the entity running the marketplace will render its business into the inventory-based model, where FDI is barred, also makes it clear that these foreign-owned e-commerce enterprises can no longer sell wares sporting their own brand names online.
  • And the most worrisome norm is the vaguely worded one prohibiting ventures from “directly or indirectly” influencing the sale price of goods. This is construed by most observers as a deterrent for discounts.


Three stipulations in the guidelines are seen as retrogressive and far removed from the government’s stated intent of improving the ease of doing business-

  • The first is that a marketplace player cannot allow one vendor or its group companies to account for more than 25% of sales through its platform. The restriction seems to be an outcome of the flawed thinking that FDI in direct vendors in e-commerce should not be allowed and the artificial separation between vendors and marketplace players should be maintained through such limits placed on their sales.
  • The second stipulation says the marketplace player “cannot directly or indirectly influence the sale price of goods and services and shall maintain a level playing field”. This move restricts consumer’s choice.
  • The guidelines also say sellers will be solely responsible for warranties and guarantees. This may provide some legal protection to marketplace platforms but given that several have sought to build their own brand values by bolstering manufacturer guarantees – Flipkart has just launched an expensive TV commercial to this effect – the guidelines do not help consumers.

How would these guidelines affect consumers?

For the consumer, strict enforcement of the guidelines could make it difficult to access value-for-money deals. E-commerce, including m-commerce spurred by India’s smartphone surge, have been a significant disruptor in the way domestic consumers shop. If consumers lose interest, the Centre’s guidelines could well disrupt this disruption and end up staunching the very flow of foreign capital it aims to attract.


The traders’ associations are dubbing the new move as allowing foreign firms backdoor entry into the offline, multi-brand retail sector itself, at the cost of domestic firms. However, in the long run, the policy might resolve some of these issues. The government too should be open to course correction, if necessary, given the evolving and ever-changing nature of e-commerce.