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Refining FDI provisions

FDI India 1

Being one of the most diligent sources of revenue for the Indian economy, foreign direct investment (FDI) is gaining importance with each passing day. Investments made by any individual or firm in one country into business streams situated in a foreign country are termed as FDI. Generally, FDI takes place when the following conditions are satisfied by an investor:

  • Establishing foreign business operations
  • Acquiring foreign business assets
  • Establishing ownership
  • Controlling interest in a foreign company

With the purpose of fortifying the investor’s and stakeholder’s sentiments in the Indian e-commerce sector, refined policy is introduced to ensure that online and offline business to customer (B2C) models are kept on the same pedestal as business to business (B2B) models.

Precarious regulations:
There are few tricky regulations but befitting efforts to alter the like have been made thus, offering guidance to the companies to adopt FDI.

  1. Wholesale trading: FDI policy authorizes entities engaged in wholesale trading i.e., organizations selling articles to retailers, commercial, industrial, institutional, other wholesalers or to other professional business users and related subordinated service providers to shoulder B2B e-commerce. 100% FDI under automatic route is allowed in such organizations subject to such organizations adhering with all the conditions prescribed under the FDI policy.
  1. RuPay: Another suggestion mandates that home-grown card network RuPay which is owned by 10 local and foreign banks should be included as a payment option for all online transactions. This move will enable RuPay to compete with global payment firms like Visa and MasterCard.
  1. Multi-brand retail trading (MBRT): Organizations with FDI associated with MBRT are prohibited to undertake retail trading, in any form, by e-commerce medium. The rationale behind this is obvious as the policy on MBRT laid down in the FDI policy is an enabling policy and relevant state governments / union territories are allowed to take decisions on their own in regard to execution of the MBRT policy in the respective areas. MBRT retail sales can only be implemented in those states / union territories which have conceded or will concede in future to sanction FDI in MBRT.

In prior 2 – 3 years, Indian multi-brand e-commerce sector has been in the limelight for a while as well as proclaimed to be on an all-time rise witnessing exponential growth, investments covering millions of dollars, numerous mergers and acquisitions, businesses being valued for costs unbelievable and dynamic competition among domestic as well as global champions. However, these are coupled with few ambiguities too. For instance, the retail face of IndiaMart, Tolexo abruptly discontinued its operations after release of a government notification leading to a lot of disarray regarding FDI in the retail sector. Imposition of ceiling of 51% FDI in multi-brand retailing, subject to government approval as mentioned in FDI policy issued by Department of Industrial Policy and Promotion (DIPP) observed relatively complex situation.

Present day scenario
Amazon and E-bay, US based e-commerce companies have been continuously propelling the Indian government to liberalize the e-commerce sector further enabling them in selling their products directly to consumers. Traders have dismissed the proposed policy to allow FDI in e-commerce, but the views expressed by the global and domestic e-commerce companies are mixed. India’s retailer association is further diverged on the matter of FDI influx in e-commerce. FDI in e-commerce will lead to boosting infrastructure development and spurring manufacturing sector but it could also resulting in large scale job losses. Currently, the government is still at halt for views of all stakeholders before allowing FDI in e-commerce.

To sum up, e-commerce including online retail in India comprises of a decent fraction of total sales and is set to grow to a substantial amount owing to a lot of factors including

  • Increasing disposable incomes
  • Rising adoption and penetration of technology
  • Rapid urbanization
  • Rising youth population
  • Increasing cost of running offline stores across the country

We need to make sure that policies governing the sector are designed to lubricate the future and not regulate the past. The crucial element is to develop a policy with a road map for the future rather than adjusting the past.

For detailed information on FDI, check other blogs, India: The nucleus for FDIsFDI in retail sector 

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