Profiteering Goes Online, FDI Policy Be Damned

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e-commerce

The sale is on! Customer or seller, everyone this festive season was busy making the most of what they could lay their hands on. A lot of it was all happening online. The failure of the law so far to keep pace with the dynamic reality of the digital market enables big players to make a killing by circumventing the regulatory framework for foreign investment in India.

That’s e-commerce for you. Or that is how e- commerce operates in India today.

While customers were quick to clinch whopping discounts up to 50-60 percent this season, the sellers, too, had their share of roaring success. In just three days, some sellers generated revenue matching what has been their average annual sales so far.

The sellers were not the only ones laughing all the way to the bank. Close on their heels were the “facilitators” — the e-commerce stores (online portals) that claim they only connect seller to buyer. For instance, Flipkart’s ‘Big Billion Days’ sale saw a turnover of over $300 million in gross merchandise value in just five days. That was three times the figure from last season.

With big players such as Amazon India, Snapdeal and Paytm adopting every trick in and off the book, e- commerce’s honeymoon just doesn’t seem to end. This, despite the authorities fishing for ways to breathe down the neck of online profiteers and foil the grand design to achieve unprecedented dominance over the entire spectrum of multi-brand retail in every nook and cranny of the country.

The most glaring violation is of the FDI policy itself. Although multi-brand retail is one of the sectors yet to be opened up to FDI , e-commerce thrives by bringing foreign investment into the online retail market in India. The six key players benefiting from this are Amazon India, eBay, Flipkart, Snapdeal, Paytm and Shopclues. Amazon and eBay are foreign companies. Flipkart is owned by Indians but the company is registered in Singapore and most of the investment in its Indian subsidiaries, including Flipkart Internet, is from abroad. It is similar to Amazon and eBay in that it also operates in India by forming subsidiaries. Flipkart claims to have 50,000 sellers and 50 million registered customers, while eBay has over 65,000 sellers on its platform.

Snapdeal, Paytm and Shopclues, too, are majorly dependent on foreign investment. For instance, eBay was the most influential shareholder in Snapdeal with a 9 percent stake before the Japanese Softbank recently bought a larger share.

Doubts have been raised over the funding pattern of these companies, especially the way foreign investment flows into the business-consumer interface, which is contrary to the current FDI policy. Allegations of tax evasion, too, are coming to the fore.

In August, Minister of Consumer Affairs, Food and Public Distribution Ram Vilas Paswan told Parliament, “The e-commerce activities come under the purview of different existing laws such as Information Technology Act, 2000, Contract Law, Company Act, Foreign Exchange Regulation Act (FERA), Income Tax Act, Sales Tax Act and others.” He also said that going by the Economic Survey 2014-15, the e-retail industry is expected to grow by 50 percent over the next five years.

The spoke in the e-commerce wheel as of now is the lack of political consensus on FDI in multi-brand retail, especially the BJP’s stated position on foreign investment in retail. The party has been opposed to the idea and that position is reflected in the Consolidated FDI Policy Circular of 2015, released by the Narendra Modi government on 12 May. It allows 100 percent FDI in wholesale trading, while barring wholesale or cash-and-carry traders from opening retail outlets to sell directly to consumers. As much as 51 percent FDI is also allowed in the multibrand retail business as long as the money is invested in back-end functions and not in the consumer interface. In fact, the circular clearly states that e-commerce companies “would engage only in Business to Business (B2B) e- commerce and not in retail trading”.

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