Navigating India’s E-Commerce Landscape

March 30, 2016 Posted by India Briefing Reading Time: 5 minutes

By: Tracie Frost

According to a study by PricewaterhouseCoopers and The Associated Chambers of Commerce and Industry of India, India’s e-commerce industry could experience a compounded annual growth rate of 35 percent and reach US $100 billion in annual sales over the next five years. The sector is estimated to realize a 72 percent jump in annual online purchases per individual in 2016. Additionally, the number of consumers purchasing something online has been increasing by 60 percent or more year over year.

The opportunity for continued growth in India’s e-commerce industry is substantial. A young population, rising standards of living, better internet penetration, and improved infrastructure for deliveries make e-commerce a tempting investment. However, anyone contemplating investing in India’s e-commerce sector should carefully consider the many constraints on the industry, the lack of clarity with respect to regulatory guidelines, and India’s political environment.

RELATED: Double Bind: Government Refuses to Define the ‘Online Marketplace’

Constraints on Foreign Investment in E-Commerce

Government regulation of emerging market segments is inherently reactionary as regulators adjust to new business practices that defy previous norms. Such is the case with the e-commerce sector. For instance, the government is struggling to adapt its complicated foreign direct investment (FDI) retail policy to the e-commerce industry.

India divides commercial businesses into four overlapping categories for purposes of foreign direct investment: single-brand retail, multi-brand retail, business-to-business sales, and business-to-consumer sales. Single-brand retail refers to the selling of goods under a single brand name; multi-brand goods are not allowed, even if produced by the same manufacturer, and products must be sold under the same brand internationally. India allows 100 percent FDI in single-brand retail, but only up to 49 percent by the automatic route. Any equity investment greater than 49 percent must be approved by the government. Multi-brand retail refers to the selling of multiple brands by one company. India allows 51 percent equity investment in multi-brand retail; however, government approval is required.

Single and multi-brand sales can be set up in two ways under the Indian regulatory framework: business-to-business or business-to-consumer. For e-commerce, India allows 100 percent FDI under the business-to-business framework through the automatic route for single-brand and multi-brand sales. India does not allow FDI in business-to-consumer trading, in any form, by means of e-commerce, for companies engaged in the activity of single or multi-brand retail trading. Therefore, e-commerce enterprises with FDI may only operate under a marketplace model, where they provide a portal for business transactions between buyers and sellers or under a manufacturer-to-wholesaler/wholesaler-to-retailer model. They may not sell directly to consumers.

Clarity of Regulations

India is the only country in the world that makes a distinction between single and multi-brand retail. To complicate the issue, the government has not clearly defined the terms “single-brand retail” and “multi-brand retail.” In the context of brick and mortar stores, it is relatively simple to determine whether a company is selling a single brand or multiple brands. However, for e-commerce companies, the distinction is not as simple. Companies such as Amazon and Flipkart, which operate as marketplaces (not direct sellers), often have large warehouses or “fulfillment centers” where sellers send their goods to be housed until they are sold and shipped. While e-commerce marketplaces contend that ownership remains with the seller and does not transfer to the e-commerce company, the government has questioned whether the e-commerce company actually owns the goods once they are present in the fulfillment center – and is, therefore, functioning as a business-to-consumer enterprise. Further, some have concluded that e-commerce marketplaces are direct sellers because they, and not the individual sellers, advertise the products themselves. Others have pointed to the deep discounts offered online and questioned whether the discounts are offered by the sellers or whether they are subsidized by the e-commerce marketplace, in which case, the marketplace could be said to own the products.

Lack of clarity as to what constitutes single- and multi-brand retail in the e-commerce context and regulations regarding marketplace, retail, and wholesale trading make the e-commerce sector a risky place to do business. Under the Foreign Exchange Management Act, the penalty for violating FDI rules can be up to three times the sum involved in the violation. A penalty of this sort could easily put a company out of business.

Political Environment

In the last several years, many suits have been filed in India’s courts by brick-and-mortar trade associations and companies alleging that e-commerce companies are violating the FDI rules. Their intent seems to be eliminating competition from the e-commerce marketplace. Additionally, the concern that large multi-brand retailers could displace mom and pop stores which are the backbone of many Indian family businesses is a hot political issue. Moreover, Prime Minister Modi’s government is clearly concerned that opening FDI to multi-brand retail will release the flood gates for imported goods, thus crippling Modi’s Make in India campaign.

Observations: While investment in India’s promising e-commerce industry is tempting, until the government provides greater clarity in e-commerce regulations and opens the sector to business-to-consumer sales, opportunities are limited and risk abounds.

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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