India’s latest Foreign Direct Investment (FDI) policy on e-commerce will come into effect on Feb 1, 2019. The policy introduces significant changes that could have a dramatic impact on the way major e-commerce companies carry out business as well as on the future of India’s e-commerce industry.
With the Indian e-commerce market expected to reach $200 billion by 2026, the policy aims to create a conducive environment and level the e-tail playing field to support this growth. Here’s a look at some of the key changes that have been introduced.
1. 100% FDI in B2B online marketplaces
The new policy allows 100% FDI in online marketplaces. This means that international firms can have complete ownership of e-commerce platforms that allow third-parties to sell goods to local consumers. They can also control operations such as warehousing, logistics, order fulfillment, and customer service. However, foreign entities can only transact on a B2B basis i.e. with marketplace sellers and other business entities.
2. FDI not allowed in inventory-based e-commerce models
The new policy bars FDI in e-commerce companies that follow an inventory-based model i.e. where a company owns the products or services they sell. This means that foreign investors can no longer own or control the inventory in a local e-commerce company. TataCliq is an example of an inventory-based e-commerce firm, owning most of the products sold on its website.
3. Vendors prohibited from purchasing more than 25% of inventory from a marketplace entity
A vendor cannot purchase more than 25% of its inventory from the same e-commerce marketplace or its group companies it plans to sell them on. Doing so will equate to the inventory being controlled by the marketplace, which the new policy prohibits. Flipkart and Amazon India control a sizable chunk of their inventory, via local vendors. This policy puts restrictions on such tactics by capping the inventory that vendors purchase from their parent companies.
4. 100% FDI in single-brand retail
Foreign brands can now automatically enter the Indian e-commerce market and own 100% of the operations. This change will allow high-end brands to control how their products are priced and marketed in the country, and help provide better customer services.
With a goal to encourage growth in the MSME sector, such entities are expected to source at least 30% of their goods locally.
No FDI is allowed in multi-brand retail via online channels.
5. Restrictions on steep discounts and cash-backs
To maintain a level playing field for e-tailers, the policy restricts marketplaces from influencing the selling price of goods and services or discriminating against sellers using their services.