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India Eases Rules on Foreign Investment for E-Commerce

In an effort to attract more foreign investors, India said Tuesday it would allow 100 percent foreign direct investment (FDI) for the e-commerce market, which would change things for big companies like Amazon and eBay that are already doing business there under the marketplace approach.

Before this week’s ruling, foreign retailers could conduct e-commerce business in India as a facilitator only, meaning they could connect buyers with sellers (the marketplace model) but couldn’t own their own inventory (the inventory-based model).

According to India’s Department of Industrial Policy and Promotion (DIPP), a marketplace model of e-commerce means providing an e-tail platform to act as a facilitator between buyer and seller. An inventory-based model means an e-commerce activity where e-tailer owns the inventory that’s sold directly to consumers.

Now, under the new ruling, foreign e-commerce businesses will be able to enter into transactions with sellers on their platforms for business-to-business (B2B).

One concern, however, is the other part of the ruling, which stipulates that an e-commerce site cannot have more than 25 percent of its sales coming from one single vendor. This could prove problematic for Amazon, whose biggest seller in India, Cloudtail, is estimated to account for close to 40 percent of its sales.

FDI is only allowed for business-to-consumer (B2C) in three instances: a manufacturer can sell its made in India products through e-commerce retail; a single brand retail trading entity operating through brick-and-mortar stores can undertake retail trading via e-commerce; and an Indian manufacturer can sell its own single brand products through e-commerce retail.

India has had strict rules around FDI for retail. The country doesn’t allow 100 percent foreign investment for physical stores with multiple brands—those are allowed 51 percent FDI. The government allowed 100 percent FDI for single brand retail in 2011.

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India’s loosened e-commerce regulations may not go far enough, however.

“The new regulations do not in fact allow foreign companies to operate as retailers in this space; instead, they may still only be marketplace providers. That is, they are restricted to being more like eBay than Amazon,” Forbes wrote in an article.

While the move might work politically, it doesn’t benefit the consumer as the 100 percent FDI allowance works only in the provision of marketplaces.

“We’re not supposed to be running the economy for the benefit of the producers but rather for the consumer,” Forbes continued.

E-commerce in India has seen exponential growth and the upward trajectory is expected to continue, with the industry projected to be worth $100 billion by 2020.