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Online marketplaces can get up to 100% foreign investment

business Updated: Mar 30, 2016 00:36 IST
HT Correspondent
Online marketplaces

India’s e-commerce market is currently estimated at Rs 19,650 cr, minus travel portals. (File Photo)

Online marketplaces can get up to 100% foreign direct investment (FDI) in India, the government said on Tuesday in a new set of guidelines aimed at clearly defining overseas investment rules in the country’s booming e-commerce space.

“100% FDI under automatic route is permitted in marketplace model of e-commerce,” a Department of Industrial Policy and Promotion (DIPP) notification clarified on Tuesday.

Most of India’s poster boy online retail portals such as Flipkart and Snapdeal, which have attracted eye-popping valuations, have structured themselves as aggregators that act as “marketplaces” for people to choose and buy products of companies that put up goods for sale through these gateways. Global e-retail giants such as Amazon and eBay are already operate in India through subsidiaries.

The Centre, however, made it clear that FDI was not permitted in the “inventory based” model of e-commerce, implying companies that get FDI cannot buy and store goods from various vendors to eventually sell to consumers.

India’s online retail industry is currently estimated at $20 billion (about Rs 1.36 lakh crore). These firms, which sell products from cow dung cakes to hi-tech gadgets, have attracted large sums of investment from foreign venture and private equity funds, driven by the country’s fast-expanding mobile and internet universe.

The government also clarified that FDI will be permitted only if the products from a single vendor or a group of companies do not exceed the quarter of the online retail “marketplace’s” total sales, a move aimed at preventing back-door overseas investment in multi-brand retail.

The latest clarifications, aimed at enabling more foreign investment in the sector, also come amid an ongoing probe on allegations of violation of foreign exchange rules by some online retail firms.

The Enforcement Directorate (ED), an agency that tracks overseas money flows, is looking at books of accounts of some online retail companies to determine whether they violated FDI rules by selling products of multiple brands through their portals.

India currently allows up to 51% FDI in multi-brand retail as part of a policy notified by the previous UPA government.

The government said on Tuesday that “marketplace” e-commerce companies “may provide support services such as warehouses, logistics, order fulfillment and payment collection.” These clarifications could strengthen their case in the ED probe on charges that some of these companies may have stocked up goods through outright purchases from manufacturers and later sold these at deep discounts to customers directly.

“It is a comprehensive announcement, which will pave the way for accelerated growth of the sector in India”, said Rajnish Wahi, senior vice-president, corporate affairs and communication , Snapdeal.

Others echoed similar views.

“The clarity of the definition of e-commerce and marketplace model will allow many players to enter the industry through marketplace route,” said Sanjay Sethi, CEO and co-founder, ShopClues.