A Government document released in December last year mentions that India’s e-commerce market is growing at an annual rate of 51% every year and is expected to reach US$ 200 billion by the end of the year 2026. This makes India’s growth in e-commerce one of the highest in the world. In this post, we look at the factors that have contributed to this upward trajectory in e-commerce sales and also mention laws and regulations applicable to the sector.
Towards an upward spiral – What factors gave a boost to India’s growth story in e-commerce?
- Government policies: Since the year 2014, the government has bolstered investment and setting-up of units in the e-commerce segment through a host of initiatives such as Make in India, Startup India, Skill India and Innovation Fund.
- Digital payment options: A necessary utility for making online transactions, the growth in number and the quality of digital payment options have greatly enhanced the ability of the Indian shoppers. While government-owned BHIM is one such trusted app, it is PayTM that enjoys maximum revenues and user-base. Demonetization can also be loosely traced as one of the reasons, as it has led to a large chunk of population shifting to online payment alternatives.
- Internet penetration: The increase in the number of smartphone users alongside massive leaps in connecting remote villages through the Digital India program have also led to a growth in sales in the e-commerce business.
- Consumer wealth and literacy: Other factors that have contributed to an increase in the online business are the efforts to enrol more children in schools and enhance the level of literacy in adults through various programs. The rise in living standards and the emergence of young-elite middle-class professionals also contributed.
FDI Regulations: Inventory-based and market-place based models of e-commerce – What are they?
As the current FDI policy stands, there is no prohibition in seeking investments for the market place model for e-commerce; however, the inventory-based model continues to be heavily regulated with no scope for foreign investment in the same. In a market place model, the e-commerce platform, akin to a market, merely provides a platform for buyers and sellers to interact and may also provide the necessary services like packaging, shipping and delivery. Some of the classic examples are Amazon and Flipkart, which do not have goods of their own but offer services to sellers to reach out to a large base of customers. However, in an inventory-based model, the online company owns good and may also sell them under its own name while taking care of the entire process from procurement of goods or manufacture to actual delivery.
Examples of this type are PepperFry and Jabong.
While a marketplace model is highly scalable as it can encompass a wide variety of goods, it suffers from quality concerns due to the presence of a large number of sellers. In an inventory based model, there is greater control, access to resources and hence, the ability to derive huge profit margins. There can also be hybrid models involving a combination of both inventory and market traits, however, unless an entity is a 100 percent market place style, it cannot raise foreign capital.
Indian Contract Act: What happens to warranties and guarantees in online retailing?
The FDI policy has clarified that the e-commerce company operating in the marketplace model will not bear any responsibilities of warranties. The warranty/guarantee of products or services sold online will be borne by the sellers themselves. This means that while setting up an online retail company, your contracts must mandatorily include a clause transferring the onus of meeting such obligations on the sellers. However, in limited cases, there may be some liabilities that may still ensue on the retailer.
FDI policy for manufacturing entities
The FDI policy provides that a manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce, without Governmental approval. Thus, manufacturing entities selling their products on e-commerce retail can accept FDI up to 100% under the automatic route.
FDI policy for trading entities
For those businesses that are engaged in B2B trading – which may be in cash or wholesale trading, a 100 percent automatic approval route FDI is permitted. Although it excludes any retail sales, selling to industrial, commercial, institutional and professional business users are considered wholesale customers, even if they might be consumers.
FDI prohibition in multi-brand Retail Trading (MBRT) business
There is a complete prohibition on e-commerce presence by those entities which have FDI in the multi-brand retail trade. Multi-brand retail trading is a concept which means selling a bouquet of brands under the same chain (example, Shoppers Stop selling Arrow, Flying Machine, Biba, Titan – all under the same roof) and has been rather controversial. Although states and union territories are free to choose whether to implement this prohibition or not, the protectionist sentiment in the government towards small retailers continues to affect this restriction.
FDI policy in single-brand retail trade
Very recently, in January 2018, the government has permitted 100% FDI under automatic route in entities engaged in single-brand retail trading. This not only has the potential of improving supply chain and access for brands but also limits the time, cost and filing procedure for foreign entities trying to enter the Indian market.
Consumer Protection Act – Uniform applicability on all business models
Regardless of the type of business model, the Consumer Protection Act will still apply to the retailers and sellers. The most recent case is of Amazon having to pay a penalty of a few thousands for incorrectly displaying the price of a laptop, which was ordered by a Consumer Court.