India not ready for retail FDI: Sitharaman
Commerce and Industry Minister Nirmala Sitharaman stated that India is not ready for FDI in the multi-brand retail sector. Sitharaman justified her statement saying that it could not be possible until farmers and retailers in India are provided adequate compensation to face market competition. She said financial inclusion for farmers, lack of back-end infrastructural support and inadequate credit support remain un-addressed.
Foreign Direct Investment (FDI) is an investment made by a company into another company, which is based in another country. The foreign investor company gains a significant level of control or influence on the other company.
India's FDI Policy (Consolidated FDI Policy, 2015) permitted FDI up to 100% in e-commerce activities. This however applied only to B2B ecommerce (business to business) under Automatic Route and not to online retailers/e-retailers also known as B2C ecommerce (business to consumer). B2B trading is between business entities such as manufacturers and wholesalers or wholesalers and retailers. In B2C, online businesses sell directly to consumers.
In June 2015, the NDA government refused to ease FDI rules for electronic commerce, saying it was against the consumer's interest. Further the center was keen on making 'Make in India' campaign successful before opening up B2C e-commerce to foreign retailers
While FDI was banned for B2C, e-tailers like Amazon, Flipkart operated through alternative route. They got around rules using 'market place' model where the website acts as a platform for retailers, distributors to sell products to customers. Delhi High Court, while hearing petition filed by offline retailers, in Sep 2015, said there was "a prima facie violation" of FDI norms by these online companies.
The Centre allowed 100% Foreign Direct Investment (FDI) in e-commerce through automatic route under the marketplace model or Business-to-Customer transactions to legitimize the e-commerce businesses in India. This decision by government brought much awaited clarity on FDI policy for the e-commerce sector. The Centre had also defined 'marketplace format', which includes e-commerce support services and sellers like warehousing, logistics, call centers, order fulfillment, etc.
The marketplace model of e-commerce was defined by the government as, providing an "information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller."
The new rules mean that foreign investors can now own 100% stake in e-commerce firms, but with a market place model. These rules forbid e-market places from providing discounts, which might end the battle between e-commerce giants like Amazon, Flipkart, Snapdeal, etc,. Further they state that no company or seller can contribute to more than 25% of the total sales of an e-commerce company.
Department of Industrial Policy and Promotion (DIPP) has stated, "E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field."
Confederation of All India Traders (CAIT) had strongly opposed the decision taken by the government to allow 100% FDI in e-commerce and warned that the move would face strong opposition from traders across the country. Praveen Khandelwal, CAIT Secretary, said that it was upsetting to see BJP, which once opposed FDI, supporting it. He said the decision would obstruct the businesses of offline traders.
The government has warned the e-commerce companies against offering discounts, after the new FDI policy was announced and made effective on 30th March. The move comes after various e-tailers were continuing to offer discounts even after the 30th March announcement. The new policy aims to make e-commerce businesses sustainable and create a level playing field between e-tailers and brick and mortar stores.
After e-commerce, the NDA government eased the norms for a number of important sectors including civil aviation, defense and pharmaceuticals. The decision on FDI reforms was taken after a meeting with Prime Minister Narendra Modi. The government also paved the way for businesses such as Apple Inc to immediately establish shop in India. The opposition called this a 'panic reaction' to Raghuram Rajan's announcement.