EXCLUSIVE | Govt mulls easier rules for partial inventory. Is it FDI in B2C e-commerce by another name?

India's offline retail industry has faced an onslaught from online commerce the past few years, funded by foreign capital. Yet, months after the $16-billion Flipkart-Walmart deal, the government is now mulling allowing FDI-funded e-commerce firms to switch over from the marketplace to inventory model, a move that could further rile traditional retailers in an election year.

A panel headed by Anup Wadhawan, officer on special duty, Ministry of Commerce and Industry, had met officials from leading e-commerce companies on Wednesday, to know their thoughts for a national policy on e-commerce. The panel told the delegates that a limited inventory rule may be introduced, which would also help the government’s Make in India policy.

At present, online retail firms such as Amazon, Flipkart, Snapdeal, to name a few, follow a marketplace model, wherein they merely help sellers and buyers connect with each other by providing a technology platform.

In 2016, much to the ire of the offline traders, the government had allowed 100 percent foreign direct investment (FDI) in e-commerce firms following a marketplace model.

Under this rule, e-commerce firms looking for capital from foreign investors cannot have an inventory model. This means they cannot stock goods or services and then sell it to buyers coming to their website. Once the government allows a limited inventory model, e-commerce firms that are not 100 percent marketplace, can also raise foreign capital.

As per the 2016 policy, 100 percent foreign direct investment was allowed in business to business (B2B) e-commerce, but not in business to consumer (B2C) commerce. Under the rules, large online retail firms were classified as B2B because they were earning commission from the vendors who sold goods and services on their platforms.

However, the online retail firms skirted this rule by setting up subsidiaries which would warehouse the goods, but masqueraded as a third party merchant.

Earlier WS Retail was the largest seller of Flipkart contributing to at least 35-40 percent of its overall sale. Likewise Cloudtail India, was the biggest seller on Amazon.

The government then capped sales from a single vendor on any e-commerce platform at 25 percent. It also mandated e-commerce companies to display contact details of the vendors on its website. In addition, the warranty or guarantee of the products would be borne by the sellers and not the e-commerce companies. The idea was to ensure that the e-commerce companies cannot affect the pricing of the products directly or indirectly.

However, many e-commerce companies are still flouting the rules. They do so by sourcing products from a preferred set of vendors and subsidizing these vendors who in turn spend million of dollars on advertisements.

According to the sources mentioned above, the government feels the existing policy is being followed only in letter and not in spirit. At the same time, it is not possible and advisable for the government to micro-manage the e-commerce sector. A better option would be to allow encourage transparency by allowing online retails to hold some inventory.

This move is likely to hit offline retailers, who are already protesting against USD 16 billion Walmart-Flipkart deal announced around two months ago.

The Confederation of All India Traders (CAIT) on Monday organised a protest claiming participation from over 1 lakh traders across the country.

According to Praveen Khandelwal, secretary general of CAIT, the e-commerce marketplace has been vitiated to a great extent in past years by several leading e-commerce companies by indulging into all kinds of malpractices including predatory pricing, deep discounting and loss funding.

He had further said that at a time when there was no policy for e-commerce, it would be very easy for Walmart to circumvent the FDI policy Press Note 3 of 2016.

"We will strongly oppose any such act of the government. If the government allows the e-commerce companies to keep inventory why will the companies be interested in having vendors with them? They are not doing any charity but are here to do business," Khandelwal told Moneycontrol.

In the meeting on Wednesday which also saw the presence of Sudhanshu Pandey, joint secretary, Ministry of Commerce and Payal Malik, adviser (economics) at the Competition Commission of India, issues such as cross border data flow, taxation and consumer experiences were also discussed.

The topic of inventory based model was brought up at the fag end of the three hour-long meeting.

The government had set up a task force headed by the commerce secretary to deliberate on a national policy on e-commerce in April. The first meeting was conducted on April 24 which was attended by the Commerce and Industry Minister Suresh Prabhu. After that, a think tank was set up and in order to have discussions on the issues nine sub groups was formed.

Following meetings of the subgroups on June 20 and 24th, they were asked to submit their recommendations over the next few days.

The task force meeting on Wednesday under the chairmanship of Anup Wadhawan was conducted to finalise the draft recommendation basis the suggestions submitted by the members.

Confederation of Indian Industry (CII), Electronics and Computer Software Export Promotion Council, Internet and Mobile Association of India besides firms such as Ola, Wipro, Tech Mahindra have been participating in these meetings.

With the 2019 elections nearing, the proposal to allow inventory based e-commerce could turn out to be a political hot potato given the rampant protests by the offline traders associations.