E-commerce in India Response to Discussion Paper circulated by DIPP. Amit Prabhu

Transcription

1 E-commerce in India Response to Discussion Paper circulated by DIPP Amit Prabhu

2 Disclaimer The author is a Chartered Accountant, working as senior finance executive in a Private Enterprise. The views expressed in this document are that of the individual and should not be construed to reflect the view of his employer in part or fully.

3 FDI Policy for E-commerce in India Introduction This note is in response to the Discussion Paper on E-commerce in India 1 circulated on the website by the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India ( This document specifically focuses on the questions raised in the discussion paper and is restricted to answering them. Since the document already covers a lot of information relating to E-commerce trade globally, as well as in India, with adequate emphasis on the data relating to the industry, the emphasis of this document is restricted to highlighting broad issues. E-commerce as defined in the discussion paper is sale or purchase of goods and services conducted over network of computers or TV channels by methods specifically designed for the purpose. Clearly, e-commerce is a platform through which product or services are transacted and therefore, in essence is a separate channel or distribution of sale, distinguishing itself from the traditional form of trade which for the purpose of convenience be termed brick and mortar. FDI policy in India has thus far distinguished between single brand and multi brand retail and has restricted the definition of such retail to brick and mortar retail and clearly restricted retailing through e-commerce channels (B2c e-commerce). It is therefore essential to look segregate various forms of e-commerce on the same lines as brick and mortar retail. E-commerce Single Brand E-com Multi Brand E-com Pure Play E-com Market Place E-com 1 Discussion Paper circulated by DIPP ( )

4 Single Brand E-com Retail (Type A) The existing FDI policy 2 has defined Single Brand Retail as encompassing retail trade of products which are: - Sold under a Single Brand. - Sold under the same brand internationally i.e. products are sold under the same brand in one or more countries other than India. - Branded during the manufacturing process. Established brands and brands that are distributed through the traditional channels of distribution, multi brand retail and single brand retail, use e-commerce as an additional channel through which to distribute. The purpose of these e-commerce portals generally are: - To reach out to a larger customer base where their products are not easily available (increase distribution) - Use the portal to launch products that will be exclusively distributed via this channel (product differentiation) - Marketing tool to gain consumer insight as much of the brand sales may otherwise be happening through traditional wholesale and third party retail channels (consumer penetration) Like in the case of the retail outlets operated by these single brands, their e-commerce portals are also designed to sell the products offered under that brand. It is possible that the brand sells multiple categories of products and not all of them may be sold online. At the same time, it is possible that the brand may sell certain products or category of products only through the e-commerce channels without distributing it through the traditional channels. These single brands typical derive their Intellectual Property value from the brand itself and the portals through which they are sold, are mere conduits for distribution. The e- commerce portal would in some sense be termed subservient to the principal brand without the brand, the portal would not survive. An example of this could be an electronic brand selling its mobile phones directly to the customer or and airline selling tickets directly to the flyers. The criteria to determine should therefore be: - Is the portal the main IP created by the brand? - In the absence of the brand, can the portal continue to operate as an independent business line? - Can the brand be distributed through other channels (not necessary that they should)? From these it seems appropriate to conclude that the e-commerce portal is a mere distribution channel and as such the brand derives its value from the products and the services that are offered by the brand owner. It would therefore seem only logical, that, since retailing of Single Brand is allowed (subject to conditions), e-commerce by such brands should also be permitted, and no distinction should be brought on merely based on the channel of distribution. 2

5 Multi-brand E-com Retail (Type B) This refers to the e-commerce trade carried out by Multi-brand retailers as well as service providers like travel agents etc., whose principal business is the sale and distribution of brands not owned by them. Typically such retailers sell competing brands in each of the product category that they cater to. For example, an electronics retailer may be selling televisions made by all leading brands, likewise ticketing agents who sell airline tickets, but deal with all airlines alike. The nature of retail in this segment has also evolved in a manner where the retailers create their own brands which compete with those others that they trade in. Generally the brands that are created by these retailers are their own intellectual property, but the distribution of this is restricted to sale from these multi-brand retail outlets. Currently, investments in such retail entities have been governed by the policy statement for Investment in Multi-Brand Retail (MBRT). As an extension of their distribution through the brick and mortar stores, they may engage in selling through an e-commerce platform. The portals generally contain the third party articles as well as their own brands. As in the case of single brand retail, the purpose of the e-commerce is to complement the existing distribution set up and not to create a separate identity for the e-commerce business. The portal therefore enhances the value of the existing multi brand retailers. Then again, the Intellectual Property of the retailer is derived from the Stores that are operated by them and the e-commerce venture relies on this to drive traffic and sales. In order to determine whether a retailer falls in this bucket, one would again need to look at: - Is the portal the main IP created by the brand? - In the absence of the brand, can the portal continue to operate as an independent business line? Since the Multi brand retail is allowed subject to various restrictions, allowing them to operate e-commerce ventures will also have to be subjected to similar conditions. However, such restrictions, especially those relating to restrictions on distribution in only those states where MBRT is allowed, would severely restrict the benefit that these e-commerce portals. Pure Play E-commerce Retail (Type C) An alternative model to retailing has fast emerged in the form of retailers who deal ONLY through the e-commerce channels and have no alternative setup to retail the products and services that they deal in. They are pure play e-commerce portals ( PPER ) The main difference between a pure play e-commerce portal and that of a multi brand retailer is that the Intellectual Property of the former is completely derived from the portal itself, and that in the absence of the same, the retailer would not be in a position to derive income from retailing. Typically, these e-commerce companies invest heavily in developing the best in class features on their portal, akin to how retailers spend on design and feel of their stores. Such investment and innovations in the technology space often make them more a technology based company and less of a retailer in the minds of the customers.

6 The products that are sold through such portals are typically - Branded products that are manufactured and distributed by the brand owners, and are purchased by the PPER - Products that are manufactured by the PPER directly or indirectly or those unbranded products that are sourced. The retailers rely on the power of the e-commerce to drive sales and the value of the intellectual property is derived from the portal. In the absence of traditional sales channels, the portal is essential to sell the products traded by the retailer and therefore becomes the central theme of the business. While, this is essentially an alternative form of Multi brand retail the difference in the distribution channels makes PPER more cost efficient which allows them to pass on the benefits to the consumer in the form of discounts. Apart from convenience of being operational 24*7*365, consumers benefit from lower operational cost of PPER (as claimed!), which add value to the consumers. At the same time, the initial investment required for setting up such e-commerce ventures are in the form of investments in setting up the portal and the IT infrastructure and in the supply chain required to manage it. Given the difference in the scope of business, the investment requirement for PPER has to be different from those of MBRT. Proposed mandate for such investment is given in Annexure 2. Market Place E-com Retail (Type D) Market Place E-com portals ( MPER) allow sellers to list products they intend to sell, or buyers the products they intend to buy. The portal earns revenue mostly through the commissions earned on the sales made by the sellers. Since the portals merely help bring buyers and sellers on a common platform, it is essential to understand if they can be said to be retailing. The Oxford Dictionary defines retailing as the business of selling goods to the public, usually through stores. The Law Dictionary defines Retail 3 as to sell by small parcels, and not in the gross. To sell in small quantities. The two definitions make it clear that the act of retailing involves an element of sale. In the current instance, the sale takes place between the buyer and the seller and not between the buyer and MPER. Sale of goods is governed by the Sales of Goods Act, Section 4, of that act states: 4. Sale and agreement to sell.- (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. (2) A contract of sale may be absolute or conditional 3

7 (3) Where under a contract of sale the property in the goods in transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. The manner in which the affairs of these portals are structured, the role of the portal therefore is quite restricted and cannot be said to be the seller. It may therefore be necessary to look at the transactions to determine whether the portal guarantees anything beyond what is normally expected from any person who acts as a mere facilitator of any transaction. In case it is established that the portal is not an agent of the seller and the role is restricting to only listing of the transactions, such portals cannot be said to be retailing and hence should not be brought under the purview of FDI in e-commerce. Response to Queries raised in Discussion paper Having segregated e-commerce ventures into different formats, that are in line with the FDI policy, the queries raised in the discussion paper need to be answered for each of these formats separately. These are detailed in Annexure 1.

8 Annexure 1 Point wise Response Sl No Question 1 Should FDI be allowed in e- commerce Yes. Type A (Single Brand E-com) This should be brought in line with single brand retailing (SBRT, as defined in paragraph of the Consolidated FDI Policy dated 5 th April ) and the process, procedure and limits as applicable in that case should be applied in these cases too. Additional conditions may be needed to qualify as being Type A, as described above. In essence the Intellectual Property created would need to be tested as being derived from the brand or purely from the e- commerce portal. Yes. Type B (Multi Brand E-com) Since this category involves Multi Brand Retailers setting up e-commerce platforms to enhance distribution, they should be equated to Multi- Brand Retailing (MBRT, as defined in paragraph of the Consolidated FDI Policy dated 5 th April ) and the process, procedure and limits as applicable in that case should be applied in these cases too. Additional conditions may be needed to qualify as being Type A, as described above. In essence the Intellectual Property created would need to be tested as being derived from the brand or purely from the e- commerce portal. Yes. Type C (Pure Play E-com) A new category of retailer should be created in the FDI policy specifically for Pure Play E-commerce Retailers [ PPER ]. The purpose of these ventures is to create an alternative retailing channel of all products, which is in line with MBRT, hence FDI should be allowed in such ventures in line with the policy for MBRT. In the case of MBRT, the purpose of mandating investment in backend was to develop infrastructure in the country. In the case of PPER, bulk of the investments may be in e-commerce platform, an intangible asset. Considering the model, investments would also be needed in back end storage and front end distribution. However, if the true benefits of e-commerce has to be derived, then Type D (Market Place E-com) It is not a retailing activity and hence not covered by the regulations under Retailing

9 Sl No Question Type A (Single Brand E-com) Type B (Multi Brand E-com) Type C (Pure Play E-com) centralization of process could be considered, thereby reducing the need to making large investments in back end infrastructure. Therefore mandating investments could be counterproductive to the consumers. Type D (Market Place E-com) See Annexure 2 for complete set of proposed rules. 2 Should it be open for all products or only for nonfood products 3 Should a limit for percentage of sourcing from domestic manufacturers be prescribed? If Yes, what should be the limit Should be open in all categories, including branded / food articles. Yes. The same rules as applicable to SBRT should be applied in this case. Since there are no restrictions on the products that can be retailed under the Multi Brand Retail policy, it would not be prudent to enforce any restrictions; hence all types of products and services should be allowed to be sold. Yes. The limits as prescribed under the policy for Multi Brand Retail should be followed in this case too. However, there has to be adequate clarity on how the domestic sourcing will be calculated. Since the concept is to sell multiple brands, the Retailer in this case buys products from the brands who can (a) Manufacture locally through own manufacturing plant (b) Manufacture locally through contract manufacturers, (c) Import into India. Since the Should be open in all categories, including branded / unbranded food articles. A PPER generally deals with branded products which are manufactured and distributed by the brand owners or their distributors thereof. In these cases, the PPER buys products offered by the brand owner and may not have control on the design, product attributes and recommended retail price. The PPER buys products offered for sale by the manufacturer and the manufacturer is responsible for the product performance. Since the manufacturer is otherwise not restricted from manufacturing those products in India or NA NA

10 Sl No Question Type A (Single Brand E-com) Type B (Multi Brand E-com) sale to the retailer is domestic sale, would all such purchases qualify as locally sourced, or would the goods imported by the brand be considered as imported. Where the manufacturer is supplying through a distributor(s), determining whether a product is locally manufactured or imported may become practically difficult. Also, at a different level, where value addition in India is limited to packing and making restricted changes, there may be challenges to determine if product is locally manufactured or imported. While the purpose of establishing sourcing norms in the short run is understood, in the long run, the aim of the Government has to make sourcing from India a natural choice through focus on quality development, cost rationalization and ease of compliance. Type C (Pure Play E-com) import them, it would not be practical to impose restrictions on the PPER who retails them. (These products referred to as third party branded products) In case the PPER is involved in direct / indirect manufacture of products or sale of unbranded food products, then on such products, a local sourcing mandate of 50% seems feasible. (These products referred to as Selfbranded products ) Distinction of branded and unbranded can be done in line with clauses 2(a), (b) and (c) of the policy under SBRT. By segregating the products categories into third party and self-branded, one is able to hold the PPER responsible for only those articles for which they have complete control on the sourcing / manufacturing process. Such a mandate will make compliance easier to monitor. By setting a higher local sourcing mandate on the self-branded products, the PPER is restricted from selling cheap imports. Type D (Market Place E-com)

11 Sl No Question 4 How will retail sale under MBRT be restricted to States that have agreed to open front end retail Type A (Single Brand E-com) Not Applicable. Type B (Multi Brand E-com) Since e-commerce is an extension of the regular retail sales channel, the restrictions therein should equally apply; else it could be seen as a back door entry. Type C (Pure Play E-com) No restriction on the distribution and sale of products. Type D (Market Place E-com) NA Additionally, the current regulation under MBRT also restricts the stores to be set up in certain cities within the state. This may ALSO have to be enforced. However, these restrictions severely restrict the purpose with which an e-commerce platform be opened by a Multi brand retailer. The restrictions under the MBRT policy need to re-visited and the policy of allowing states to permit or not needs to be re-looked at. 5 What should the entry routes and caps be in FDI in B2C e-commerce companies? Should it be automatic up to 50%? As in the case of SBRT, up to 49% is allowed under the automatic route and anything in excess of that needs to be routed through DIPP / FIPB. Since 100% FDI is allowed in SBRT, this being a channel of distribution, no distinction is needed and no additional caps suggested. In line with the regulations for MBRT, no automatic approval should be permitted. All Retailers qualifying to retail under the regulations for MBRT should be allowed to sell through e-commerce platform, without the need for additional approval. Entry only under the approval route. NA All Retailers having SBRT approval should be allowed to set up e-commerce distribution

12 Sl No Question Type A (Single Brand E-com) networks without the need for additional approvals. Type B (Multi Brand E-com) Type C (Pure Play E-com) Type D (Market Place E-com) 6 What are likely benefits to Indian economy particularly in terms of a. FDI inflows (amount) b. Additional employment (numbers) c. Back-end infrastructure (amount) d. Efficiency (e.g. lower price to customers, higher price to producers / manufacturers, ease of operations etc.) The advantages of e-commerce trade can be said as accruing to : - Seller : Provides additional channel of sales and helps create nationwide distribution overnight with minimal effort on the ground. Such a channel would be cost efficient beyond a certain size and will do away with brick & mortar store in smaller town s thereby overall increasing consumer penetration but on a profitable basis. Investments on the platform may not yield much FDI and additional employment will be generated in the supply chain functions (more low end job creation, either directly or contractual). Setting up of e-commerce platform will help customers address their problems more efficiently and should vastly improve customer satisfaction. Provides smaller Indian brands to tie up with collaborators and set up new ventures to start and sell online directly, The advantages of e-commerce trade can be said as accruing to : - Seller : Provides additional channel of sales and helps create nationwide distribution overnight with minimal effort on the ground. Such a channel would be cost efficient beyond a certain size and will do away with brick & mortar store in smaller town s thereby overall increasing consumer penetration but on a profitable basis. Investments on the platform may not yield much FDI and additional employment will be generated in the supply chain functions (more low end job creation, either directly or contractual). Setting up of e-commerce platform will help customers address their problems more efficiently and should vastly improve customer satisfaction. Provides smaller Indian brands to tie up with collaborators and set up new ventures to start and sell online directly, The advantages of e-commerce trade can be said as accruing to : - Seller : Provides additional channel of sales and helps create nationwide distribution overnight with minimal effort on the ground. Such a channel would be cost efficient beyond a certain size and will do away with brick & mortar store in smaller town s thereby overall increasing consumer penetration but on a profitable basis. Investments on the platform may not yield much FDI and additional employment will be generated in the supply chain functions (more low end job creation, either directly or contractual). Setting up of e-commerce platform will help customers address their problems more efficiently and should vastly improve customer satisfaction. Provides smaller Indian brands to tie up with collaborators and set up new ventures to start and sell online directly, NA

13 Sl No Question Type A (Single Brand E-com) without need to set up stores. Type B (Multi Brand E-com) without need to set up stores. Type C (Pure Play E-com) without need to set up stores. Type D (Market Place E-com) - Consumer : A lot of consumers who do not access to specific products, due to lack of distribution have access to buying products and services. This enhances consumer choices and will therefore elevate level of customer service across the spectrum. Increase in competition along with savings to the seller should help in driving costs lower thereby making it cheaper for consumers to buy. - Consumer : A lot of consumers who do not access to specific products, due to lack of distribution have access to buying products and services. This enhances consumer choices and will therefore elevate level of customer service across the spectrum. Increase in competition along with savings to the seller should help in driving costs lower thereby making it cheaper for consumers to buy. - Consumer : A lot of consumers who do not access to specific products, due to lack of distribution have access to buying products and services. This enhances consumer choices and will therefore elevate level of customer service across the spectrum. Increase in competition along with savings to the seller should help in driving costs lower thereby making it cheaper for consumers to buy. 7 What should B2C e- commerce encompass a. Goods b. Services c. Intellectual Property - Government & Others : Since this is an additional channel of sales, this would automatically create new jobs, especially in supply chain industry. Expansion in size of retail helps in higher incidence of tax and collection thereof. E-commerce should encompass Goods & Services, but the distinction should be based on the IP created / used in the process. - Government & Others : Since this is an additional channel of sales, this would automatically create new jobs, especially in supply chain industry. Expansion in size of retail helps in higher incidence of tax and collection thereof. E-commerce should encompass Goods & Services, but the distinction should be based on the IP created / used in the process. - Government & Others : Since this is an additional channel of sales, this would automatically create new jobs, especially in supply chain industry. Expansion in size of retail helps in higher incidence of tax and collection thereof. E-commerce should encompass Goods & Services, but the distinction should be based on the IP created / used in the process. NA

14 Annexure 2 Proposed Rules for FDI in PPER Particulars Percentage of FDI Cap / Equity Entry Route Products allowed to be sold Minimum Investment Investment Mandate in Backend Sourcing Mandate Condition 51% Prior Government Approval No restriction on sale of any products No Limit No Limit Goods sold will be segregated into two categories : Third Party Branded Products A product will termed third party branded product if : a. The products are locally purchased from the manufacturer (owner of the actual brand ) or any distributor of that brand appointed by the brand owner. b. The product is sold under the same brand name internationally, i.e., products that are sold under the same brand name in one or more other countries. c. Products are branded during manufacturing process. d. In case of products that are not sold by the manufacturer / brand owner outside India, the same should be manufactured in India. All other products will be called Self-branded products. Distribution Restriction Sourcing of a minimum of 50% of self-branded products should be done locally. (Appropriate time frame may be described for this compliance) No restriction. Goods can be shipped to any place within India or exported. (subject to other restrictions as may apply on exports) Additional Compliance Since e-commerce retailers are able to reduce the cost of distribution through savings in rents, staffing cost etc., they are able to pass on these savings to the consumers in the form of discounts. However, excessive discounting has the ability of suppressing competition, especially if done deliberately. It may therefore be essential to keep track of such practices. Suitable amendments in various Acts may be needed to ensure that such data is made available by PPERs and which can be used to determine any practices that may tantamount to predatory pricing as defined under the Competition Act, It has to be borne in mind that the risk posed by e-commerce retailers through excessive discounting is higher than those posed by regular retailers since they are able to communicate and garner orders from a much larger consumer base at a single time. Therefore additional conditions to safeguard retailers against such a practice may be needed which are not in place for MBRT.