100% FDI in retail allowed, will it change the face of the industry

In recent reform announcements made by the central government as Prime Minister Narendra Modi has been visiting Brussels and then the US comes next to his trip plan, government has now allowed 100% Foreign Direct Investment (FDI) in e-retail industry in India.

E- commerce Industry in India is action packed and the latest announcement only helps bring clarity in rules and the way the e-commerce companies especially foreign owned can participate in one of the most vibrant sectors in India.

A  Foreign Direct Investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country. GOI has eased FDI norms in 15 sectors including India’s coveted defence, private sector banks and pension sector. As much as 100 % FDI is allowed in medical devices and plantations in cofee /rubber/ olive oil/palm oil and cardamom via automatic route.

The recent GOI announcement is cheered by several e-commerce players as it is believed it might stop the predatory pricing by several operators. 100 % FDI is allowed only for e-commerce players that too under the market place model and not the inventory led model. This move may allow the e-commerce players to hold on to their pricing powers.

Market place model is one under which the e-commerce players simply lists the products on their platform. In the inventory models, the products and services are actually owned by the e-commerce player. Maximising capital efficiency, maximising customer delight and minimising logistical complexity are the major perceived advantages in favour of the market place model. Marketplace model enable a large, fragmented base of buyers and sellers to discover price and transact in transparent, efficient and trusted manner.

With 100% FDI is allowed in e-commerce industry via automatic route in only market place model – several players could be interested in entering Indian markets. Demand for commercial estate is expected to go up with this announcement as several of these e-commerce players will be looking for large office spaces. To bring in clarity in the industry and how it works the GOI has come out with clear definitions on e-commerce, maketplace model and inventory model. The new guidelines will now legally allow companies like Amazon and Alibaba to be facilitators between buyers and sellers in India.

From consumer point of view one of the key fall out of the policy is that these market place model executors will not be allowed to influence the product pricing directly or indirectly. Another interesting aspect of the policy announcement is the cap of 25% on sales through a single vendor. This will force the e-commerce players to tap on several sellers and no single seller can dominate the space. Also, for warranties and responsibilities the sellers will be responsible and not the e-commerce players operating on the market place model.

Great announcement at an opportune time for almost all the stakeholders viz., foreign e-commerce players, Indian e-commerce players and consumers. Policy reforms seems to be kicking fast in India .