By Ankur Pahwa, EY
Press Note No. 2 (2018 Series) (PN2) will have a significant impact on various e-commerce players, be it on their supply chain, commercial arrangements, accelerator programmes or equity partnerships.
While the policy is set to be effective from February 1, there are various areas that continue to be unclear and warrant a clarification by the department of industrial policy and promotion (DIPP). Considering the complex supply chain, the limited time available to realign business models and the lack of clarity on numerous clauses, an extension to the proposed timeline is warranted.
One of the changes proposed under PN2 is to restrict vendors to sell on the marketplace platform ‘if more than 25% of purchases of such vendor are from the marketplace/group entities’. But it’s unclear if such 25% restriction needs to be tested in relation to total purchases of vendor irrespective of their mode of sale, or only with respect to goods intended to be sold through marketplace platform.
Considering the intent behind such a restriction, it should be tested in relation to the former. A clarification about this from DIPP would be helpful, along with whether existing inventory of such vendors, as on January 31, would be considered for computing the 25% restriction.
The other key amendment includes restriction for vendors to sell on marketplace platform if such marketplace/group entities have ‘equity participation’ in the vendor. There is no clarity on what is intended to be covered within the ambit of ‘equity participation’ — whether even nominal equity, say, of 5%, or indirect equity stake (without having control over the vendor) would also be restricted.
Such a restriction would also have a significant impact for vendors/entities engaged in, say, manufacturing or single-brand retail or food product retail, these being sectors where otherwise online sales are permitted under the respective FDI policies.
For instance, an entity that is engaged in food product retail trading (FPRT), where 100% FDI is allowed, is permitted to undertake e-commerce sales under the FDI policy for FPRT sector. However, under PN2, such an entity would not be permitted to sell on the marketplace platform, while being allowed to sell on any other third-party platform.
This is probably unintended, but if not, then it’s unclear why something permitted by law is now being regulated. This could, in effect, restrict foreign investment in sectors where sales are primarily e-commerce driven, like food retail, and numerous private labels with FDI.
Further, in the context of the sale of private labels, while DIPP has clarified that the policy does not impose any restriction on the nature of products that can be sold, there is no clarity in relation to the ‘equity participation’ restriction condition.
PN2 also provides that services like logistics and warehousing could be provided by the marketplace entity to vendors only at ‘arm’s length’ and in a ‘fair and non-discriminatory’ manner. It also states that where a service is offered to any vendor, not offered to others in similar circumstances, it will be deemed to be unfair and discriminatory.
In this context, the reference to ‘similar circumstances’ is unclear. It would also be good to get clarity around determining what constitutes ‘arm’s length’.
As to matters of exclusivity, while the language of the policy suggests restriction only if such exclusivity is imposed by the marketplace entity, and does not restrict sellers to voluntarily opt for selling exclusively on the platform, a clearer picture needs to be provided. Exclusivity, by itself, is a commercial arrangement and can’t be regulated.
While the regulators have reiterated that PN2 intends to ensure better implementation of the existing policy in letter and spirit, to enable large e-commerce players to comply and streamline their operating models by February 1 in accordance with the PN2 conditions, it’s imperative for DIPP to clarify on all these issues.
Online and offline are only channels for retail. Online comprises only 3% of total retail in India. How these regulations will help small traders allegedly most affected by e-commerce is unclear, and requires more serious study. The ultimate goal, one should think, is that all retail channels — online and offline — work more effectively and spur consumption, the key driver for economic growth.
(The writer is partner & national leader, ecommerce & consumer internet, EY India. Views expressed above are his own)
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