Foreign direct investment guidelines are overdue but restrictive

A formal policy framework was certainly needed but it is unlikely to be welcomed in its current form.

The policy announced on Tuesday to allow 100 per cent foreign direct investment in e-commerce companies following the marketplace model are likely to disappoint those looking for "reform" in the guidelines.

There will also be legitimate questions on how the policy will encourage foreign investors to continue to bankroll one of India's fastest-growing businesses.

At best, the announcement is a case of policy belatedly catching up with reality. Foreign-funded marketplace retailers -- that is, companies that act as technology intermediaries to connect buyers and sellers but do not sell goods directly to consumers -- such as Amazon, Flipkart, and Snapdeal -- have been operating in India for several years now, exploiting a grey area in policy.

A formal policy framework was certainly long overdue but it is unlikely to be welcomed in its current form.

In particular, two stipulations in the guidelines are retrogressive and far removed from the government's stated intent of improving the ease of doing business. The first is that a marketplace player cannot allow one vendor or its group companies to account for more than 25 per cent of sales through its platform.

The restriction seems to be an outcome of the flawed thinking that FDI in direct vendors in e-commerce should not be allowed and the artificial separation between vendors and marketplace players should be maintained through such limits placed on their sales.

The second stipulation says the marketplace player "cannot directly or indirectly influence the sale price of goods and services and shall maintain a level playing field".

This latter statement is a masterpiece of ambiguity.

Does it mean marketplaces cannot offer discounts over and above the discounts that competitors offer for the same product? How will the fact of "influence," direct or indirect, be established?

Whatever the interpretation, the broad attempt to mandate distribution (by restricting the number of sellers per marketplace) and pricing, as these two guidelines do, can hardly be called progressive; indeed, they restrict consumer choice and almost hark back to the price and distribution controls on commodities that were jettisoned in the 1990s.

The guidelines also say sellers will be solely responsible for warranties and guarantees.

This may provide some legal protection to marketplace platforms but given that several have sought to build their own brand values by bolstering manufacturer guarantees -- Flipkart has just launched an expensive TV commercial to this effect - the guidelines do not help consumers.

Overall, the policy intent of these guidelines is hard to gauge. Since there is no mention of Indian-owned marketplaces, should it be assumed that platforms wholly owned by Indian investors are exempt from these restrictions?

In some respects, the confusions in the latest set of guidelines reflect the uncertainties that assail the broader policy on FDI in retail, with its differential treatment for complex, artificially-created formats.

Why, for instance, is the marketplace model being singled out for 100 per cent FDI and not all e-retail models or, for that matter, all retail formats?

It is hard to escape the notion that past and present regimes have been prey to vested interests, whether it is big Indian retail, traders, or lobbies representing neighbourhood shops.

Political motivations mask the fundamental understanding that retail, with its high employment multiplier, is ultimately a seamless business.

Consumers' best interests are not served by pandering to those who cannot or are unwilling to compete. In that sense, the latest guidelines have done little to move the reform process forward.

The image is used for representational purpose only. Photograph: Reuters