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BIG BOX vs DOT COM & Absurdities Of FDI In Retail Policy

Published on Fri, May 29,2015 | 22:47, Updated at Tue, Jun 02 at 21:30Source : CNBC-TV18 |   Watch Video :

Marks & Spencer can set up stores in India but not sell online via its own website here. Amazon can’t sell the Kindle directly on www.amazon.in! Indian retailers have to buy the kindle from Amazon and then pay it a fee to sell on it on the Amazon India website, storing the Kindle at an Amazon warehouse and using Amazon logistics to deliver it to the consumer!

On The Firm today we focus on the absurdities of India’s FDI in retail policy and the battle between Big Box and Dot Com!

The Retailers Association of India has, on behalf of brick and mortar retailers, filed a petition in the Delhi High Court asking for a level playing field with online retailers. You see, FDI in brick & mortar retail companies is restricted & conditional. For instance only 51% FDI is permitted in a multi-brand retailer and it comes with several stipulations – a minimum $100 million foreign investment, of that 50% or a minimum $50 million must be invested in ‘back end infrastructure’, a minimum 30% of the goods sold must be sourced from ‘small & medium sized businesses’ in India and retail sales outlets can only be set up in cities with a population of 10 lakhs and more. That too only if the state government is willing to permit FDI in retail in its state. Even after having jumped through all these hoops, an FDI funded multi-brand retailer cannot sell online!

FDI IN MULTI-BRAND RETAIL
Only upto 51%

Minimum $100 mn foreign investment
Minimum 50% of foreign investment in back-end infrastructure

Minimum 30% goods to be sourced from SME

Stores only in cities with 10+ lakh population

Only if State Government permits FDI in retail

ECOMMERCE NOT PERMITTED!  

But life is no easier for the e-commerce guys, because selling online to customers is not allowed in India. So you are wondering how Flipkart and Snapdeal and Amazon and all the others are in business? Well because they’ve adopted a ‘marketplace’ model! That means – they don’t sell products to customers, they only provide the website through which manufacturers & Indian retailers can sell their wares. And they provide the warehousing, the payment mechanisms, the home delivery and even accept returns! In short they do everything but own the products that are sold on their websites.

FDI IN ECOMMERCE
Upto 100% FDI permitted in B2B ecommerce
NO FDI permitted in B2C ecommerce

FDI IN ECOMMERCE
Marketplace Model

ONLY website

+

Warehousing

Payment Mechanism

Delivery

Returns

The Retailers Association of India (RAI) argues that even this marketplace model is illegal. That the Government is ‘arbitrarily and discriminatingly choosing to treat B2C e-commerce as B2B e-commerce’. And that it ought to remove the restrictions on FDI in brick & mortar retail and allow retailers to adopt this marketplace model as well.

RAI PETITION
‘Government is arbitrarily and discriminatingly choosing to treat B2C ecommerce as B2B ecommerce’

‘Remove restrictions on FDI in retail if retailers adopt marketplace model’

To discuss these issues CNBC TV18’s Menaka Doshi is joined by Kumar Rajgopalan, CEO, Retailers Association of India, Ganesh Krishnan, Promoter, Bigbasket.com and Paresh Parekh, Partner – Retail, EY.

Kumar Rajgopalan, CEO, Retailers Association of India

Ganesh Krishnan, Promoter, Bigbasket.com

Paresh Parekh, Partner – Retail, EY

Below is the transcript of Kumar Rajgopalan, Ganesh Krishnan and Paresh Parekh’s interview with CNBC-TV18's Menaka Doshi.

Doshi: Before we get into the BIG BOX vs DOT COM debate can I argue that FDI policy whether it applies to Marks & Spencer or an Amazon.in is vague and confusing and obstructive for both?

Rajgopalan: Our own issue with the government and the reason why we raised it up is that today the laws are not able to recognise the fact that the world is going omni-channel, the world is going multi-channel and the laws that are applicable in one form is not the same as the other one on the first hand. On the other hand it is getting more and more confusing for our members, irrespective of whether they want to go online or offline, to know which is the real policies and they will need to adhere to. So, there has to be one common policy and that is what we are asking for. We are asking for a level playing field.

Doshi: You would agree with me when I say that FDI policy is regressive, whether it is the policy tailored for brick and mortar or the policy that applies to e-commerce?

Krishnan: Yes, it is regressive and it is completely confusing and add to that there is central government involved, there is state involved. So, it is a complete mess and it doesn’t help whether it is online or offline players. This state of confusion and mess and lack of clarity just does not help. I just wish they would come out, clean it up and have one consistent clear policy for everyone. So, everyone is a victim here, so it is not online versus offline at all in any way.

Doshi: We might not have a debate at all because Kumar and you already agree. But Paresh, you are the only person who stands to make any money in this situation because you are the guy who helps both sides, structure around the regulation so to speak.

Parekh: To add to the absurdities of the retail single brand or multi brand trading rules I must tell you that there is one more absurdity. As Kumar was saying most retail groups internationally and in India would like to go omni-channel which means brick and mortar, you already pointed about e-commerce, they cannot do e-commerce if they get foreign money. They possibly also cannot do franchise in the same business.

Today a retail company would like to own stores, would like to franchise stores and would like to do online. So, unfortunately the law says that you cannot have franchise and online doing if you have a MBRT or Multi Brand Retail Trading.

Doshi: So, if you have a MBRT funded by FDI?

Parekh: Yes, then you cannot do franchise as well.

Doshi: If I am a manufacturer and I have a great product, T-shirts, and I have let us say FDI in my business, which manufacturing is allowed to do. Now, if I want to sell my product through my own stores and sell it online as well are you saying I cannot do that?

Parekh: First of all if you have manufactured that product in the same company you can take FDI as well as sell in your own store as well as you can sell it online.

Doshi: I can?

Parekh: Yes, because then you fall under the manufacturing root for FDI. Only if you buy the product and sell it only then you are retail.

Doshi: I just wanted to clarify that one. So, if you are a manufacturer you could do that.

Parekh: Yes, absolutely.

Doshi: Now I take the Marks & Spencer illustration, I am given to understand that an entity like Marks & Spencer can open stores in India but it cannot start a Marks&Spencer.in and sell its products online in India but can it sell its products on a Snapdeal or Flipkart or Myntra or something like that?

Parekh: They cannot because the law clearly says that a single brand company cannot sell products through e-commerce means. So there is a challenge there as well.

Doshi: So no e-commerce means? They cannot sell through any website?

Parekh: They can possibly sell it to Paresh Parekh and Paresh Parekh can then sell it on a website. So, that structuring will be required.

Doshi: If all of this is plagued with absurdity then is there scope for brick and mortar retailers to say, look we are the more aggrieved party here. Is there anyone who is hurt more because it seems to me that everybody is suffering because of this convoluted FDI policy?

Rajgopalan: I will have to bring you back to the original point that I said which is that when RAI has filed a petition here it is not about just brick and mortar retail. We represent retailers, that is what RAI was created for.

Doshi: But your petition specifically makes prayers for brick and mortar retail?

Rajgopalan: That is because of the fact that the law has been structured in a manner where the two are getting segregated. So our initial part of the petition says please create a policy that is going to be level playing field across channels very clearly. Our petition is referring to the so called marketplace models, our petition is not talking about retailer whether it is online or offline. I don’t think we can segregate them in any form of  

Doshi: But the so called marketplace also is born out of FDI policy restrictions itself, it isn’t as if eCommerce players have chosen market place over inventory models because that is the business logic of this.

Parekh: Sorry to interfere, but I have a point there. There can be genuine market place players as well and some of them are where they just provide a platform, the sellers list themselves, the buyers have no influence on the price and they are an exchange.

Doshi: But you would agree that in India most of them have been forced to adopt marketplace because there is no other option?

Krishnan: No, that is not really true because this is a new business model, just few years old, there is some evolution taking place, changes in laws have done. So, if you look at for example some of the large eCommerce players they are true marketplaces only. You have multiple sellers, and it is not a matter of convenience or structuring for the FDI policy. They do have multiple and really multiple sellers. Nobody is dominating seller as in 95 percent of these sales, so it is a true marketplace model.

Doshi: But Retailers Association of India (RAI) is arguing that market place model whether out of choice or no choice is illegal in the country.

Rajgopalan: No, not at all. What we are saying is that if it is a marketplace model and if it has to be a true marketplace model, then it has to be a purely business to business (B2B) kind of a concept in which case, we know that is a wholesale process. If it is business to customer (B2C), then it is retail… (Interrupted)

Doshi: Which is what most of these guys are. We are really not debating wholesale models here, are we?

Rajgopalan: So, if somebody is participating in pricing of the product, they are taking part in discounting the product themselves and they are saying that I am responsible for you. When they go online and they say I am the largest online store in the country, when they go and advertise to the customer and say I am the largest…  

Doshi: I will paraphrase for your comfort. All the marketplace models that exist today, where goods are sold to consumers, not to wholesalers or other businesses, in your argument, are illegal.  

Parekh: What RAI is trying to say is that there will be a level playing field which means…  

Doshi: I am not disagreeing with that, I am just going to one point it made in the petition…

Parekh: It is not about banning the marketplace…  

Doshi: They have called the market place model illegal when it sells to consumers, they have said that there is no provision in the Foreign Direct Investment (FDI) policy for any website to sell directly to consumers.  

Rajgopalan: There is not. Let us look at this whole multi-brand concept that we are talking about all the time. What does a multi-brand outlet do? It is providing a platform for many of the manufacturers sellers, resellers, whoever it is, to come and allow their products to be kept inside the store and sell it to consumers. In many of these cases, the stock is not even owned by them. So, if somebody has opened up a large department store, if somebody has opened up a store like a Central, many of the products are not owned by them at all. It is being sold through concessionaires. So, in which case, they should be taken as a marketplace, in which case we have to represent it as they are not retailers. Fact of the case is, if you are representing to the customers, that I am the store, the customers always believe that you are the person who is selling to them. So, then they are the retailer. Whether they have sold it online, or offline is not the point. There is not such thing.

Doshi: FDI policy is clear. 100 percent FDI permitted in B2B e-commerce only and hence it is clear that FDI can only invited by a company involved in B2B e-commerce. Therefore e-commerce by an Indian website or Indian company having a website hosted in India would be unable to execute B2C or customer to customer (C2C) transactions if the company has FDI. E-commerce players are arranging affairs to circumvent regulations. These are all lines from your petition.

RAI PETITION
FDI policy permits 100% FDI in B2B ecommerce only

FDI can only be invited by a company involved in B2B ecommerce

Ecommerce by an Indian company having a website hosted in India would be unable to execute B2C or C2C transactions if the company has FDI

Ecommerce players are arranging affairs to circumvent regulations

Rajgopalan: Absolutely.

Doshi: So, you are saying the marketplace model is bogus.  

Rajgopalan: That is the way it has been structured. That is a fact.

Doshi: In the light of current FDI policy, you are saying the market place models were, I want Ganesh to come in on this. Is the marketplace model bogus?

Krishnan: We are confusing two different things here. The fact that there needs to be clarity in FDI policy and encouragement for 100 percent FDI to be allowed in multi-brand retail, all those points are well-taken. On the marketplace model, if you take companies which are true marketplaces, they are technology service providers and software companies. Just because you have a warehousing where you are consolidating supply or you are doing delivery, you are consolidating delivery logistics, you are bringing analytics into place, in no way makes it…

Doshi: But if you are providing the platform to sell, you are offering the payment gateway, you are doing the warehousing, you are doing the delivery and you are accepting the returns, then you are only a shade away from a real retailer at the end of the day.

Rajgopalan: Plus you are stating that you are the largest online store.  

Krishnan: The only way you can bring efficiency is by consolidating. Just because I am a service provider, I am a technology company, I am able to consolidate supply and I actually supply the last mile because I am consolidating from multiple suppliers does not make me non-compliant. Please understand. What is my business model? If my business model happens to be that I am a technology system process service provider, I am aggregating supply, I am providing warehousing facilities, still all of them are technology and services. (Interrupted)

Doshi: Would you assert that all the companies that are today, selling via the marketplace model are legitimate marketplace people?

Krishnan: Yes, wherever there is a marketplace model, it is not defined by are you delivering, are you accepting returns. Nowhere it says it is not a marketplace. I am a service provider. I am marketplace service provider, I am consolidating supply and providing the technology, I am providing the payment…  

Doshi: I get the point, I am going to ask the expert here.

Parekh: There are three points, first is our FDI policies are negative policy. There are restrictions, so it is allowed.  

Doshi: Okay, fine, we have already established that.  

Parekh: Second is, marketplace model is, today, as per the law, permissible. There is no problem on that.  

Doshi: There is none?  

Parekh: There is none.

Doshi: But, RAI in its petition says, it is illegal.  

Parekh: No, I do not agree, that as per today’s regulations marketplace model is not illegal. They are in compliance with the law. The whole debate is a bit broader. It is not shorter debate, what the law should be. Who are the players here? What is the objection here? Farmers, small and medium suppliers? Why can we not have a policy which supports ‘Make In India’?

Doshi: I will come to that. I am just asking you one simple question right now. Is marketplace legal?

Parekh: Completely, yes. You can structure your business operations legally as per the…  
Doshi: There you have your answer. Your assertion in the petition is that it is illegal.  

Rajgopalan: Our assertion in the petition is that the spirit of the law is not getting maintained.

Parekh: Allow me to say on their behalf. Retail has been used in two contexts. Retail as per FDI definition, they are in compliance. Retail, when you take from broader spirit, you yourself said, payment gateway, everything else is done, except raising the last invoice on the customer. The context is the larger context. That is where word retail gets misunderstood.

Doshi: I will tell you one thing. I have seen brick-and-mortar retail structures that attempt to circumvent the spirit of the regulation and let us be honest, that is exactly what happened in the early days of multi-brand retail in the country. I have also seen the marketplace argument seeming a little hollow. Can you tell me if any of these guys are able to adhere to the actual spirit of the FDI regulations?

Parekh: And that is why is said, in letter, they are all compliant as per the present policy.

Doshi: In spirit, many of them on both sides would not be.

Parekh: There is nothing called spirit.

Doshi: I want to ask you this, Kumar. Are you really worried about the legality or the illegality of the marketplace or are you mostly only worried about the business impact on brick-and-mortar retailers? Because, your petition says this:

E-commerce is having a debilitating effect on retail in the physical world. Encouragement only to e-commerce without supporting the retail business would warp the entire market leading to closure of physical retail spaces and monopolisation of the retail sector by e-commerce.

Now, that worry today does not seem substantiated because e-commerce is less than one percent, I am told, of India’s retail market. So, it seems to me it is more the fear of what this will do to your business that is bothering you than the fear of whether marketplace is truly within the spirit of the law or not.  

Rajgopalan: So, I think I will have to go back to exactly the thing that I started at the start of the session. Start of the session I stated that retail is about online as well as offline and we maintained that all through. So, I do not think that you should every time segregate brick-and-mortar, although we have talked about brick-and-mortar in our petition.

Doshi: But that is the petition; that is the case you have filed in the Delhi High Court.

Rajgopalan: No, that we have kept because of the fact that there is so much of segregation that is there in the law that seems to warp the whole thing towards just an e-commerce player, including the discussion that is happening is about allowing FDI only for e-commerce and not for the others because the government seems to have taken a position. And for that position that the government has taken, we have to come back to them and tell them, listen, please allow the whole thing turned to FDI or create rules that will make sure that everybody is on a level playing field. The whole context in which we have come down to this is about a level playing field between all channels.

Krishnan: At the top-level I agree with the fact that we need to have uniform rules, we need to have good rules and all of that stuff. But that the brick-and-mortar retailers will suffer will close down, all that is incorrect, because if you see the evolution of e-commerce in the last one year at least, there is a lot of convergence happening. Big Basket for example, we are enabling 1,800 kirana stores for one hour delivery. And the kirana stores are getting the benefit of technology, apps, the inventory management system, all of this to deliver. So, it is even in our interest, which is the e-commerce players interest that the kirana stores, the brick-and-mortar actually thrives. So, there is no divergence here.

Doshi: Do you have foreign direct investment in bigbasket.com?  

Krishnan: Yes, we do.  

Doshi: So, are you selling your groceries as branded or unbranded?  

Krishnan: No, the point here is in terms of the context of this particular discussion, there are two parts of it. One is there needs to be clear guidelines, there needs to be support for the entire retail sector including…  

Doshi: None of us disagree with you on that. Are you selling your groceries branded or unbranded?

Krishnan: …Including both the offline as well as e-commerce, we need clarity on this.

Doshi: We have a political dispensation right now in power that to begin with was never in favour of FDI and retail at all brick and mortar, eCommerce whatever. Now we have a policy that sort of has survived the passage of governments, that is half baked and discriminatory as RAI says. We have a policy that forces eCommerce people to do all kinds of weird structures to get around the FDI policy. What should the new policy consist of?

Parekh: There are three players, one is farmers, second is small and medium scale manufacturers, third is the consumer. These are the three key constituents which are to be taken care of. One, if you look at the food part of it and ignore food for the time being, if you look at mobiles, if you look at electronics, if you look at apparels, there is no single argument for not allowing FDI completely on automatic basis in multi brand retail. If Indian money with Indian business houses with deep pockets are able to kind of open stores and do modern trade there is absolutely no argument. There was a time when money was chasing brick and mortar retail, we didn’t open FDI and now we are saying we open this for marriage and all that. The blue eyed boy is now eCommerce, all the money wants to follow eCommerce.

Doshi: I understand there has not been a single FDI proposal in the brick and mortar space over the last year at all?

Parekh: Except TESCO  

Doshi: So, only one deal got signed, that is in their honeymoon period after which no deal has been signed in brick and mortar at all.

Parekh: Absolutely, so we need to make brick and mortar more attractive for marriage.

Doshi: But there is lots of money going into the dotcoms?

Parekh: Yes, so there is no marriage allowed there but still people want to marry there. So, that is the thing but let me tell you if you have to support Make in India campaign why can’t there be an FDI policy which says that as long as goods or X percent of goods which you sell or trade are manufactured in India it will be allowed via brick and mortar or eCommerce or franchise so, why have this distinction? These benefits will leverage in a big way.

Doshi: So, a uniform policy that has only one stipulation saying a certain percent of your goods should be made in India, that is it, allow FDI in any format, any platform.

Parekh: Absolutely, and what fear we are talking about, if today a distributor can import all the Chinese, foreign goods and sell it in India, if I can import and sell B2B what are we trying to protect, where is the real protection? Are we just having an eyewash regulation?

Doshi: Is that the uniform policy that you want or is it that you want to be able to do a marketplace model as well? Because interestingly your petition says that.

Rajgopalan: Our own petition starts off asking for a FDI in retail, as simple as that. We have been supporting as RAI FDI in retail. From day one we have been telling that this is not the right way to segregate retail and our own petition talks about segregating retail. Now the single brand, multi brand got created, created enough of ruckus in the market.

Parekh: It takes 30 minutes to explain to a foreigner what is single brand and multi-brand.

Rajgopalan: Absolutely, then came in those whole context of telling eCommerce separately and this whole thing started because now there is this whole movement to say that eCommerce is fine but others is not fine.

Doshi: So, you like the proposal perhaps?

Rajgopalan: Absolutely, completely. Our own petition is for that.

Doshi: Ganesh, do you agree that maybe this is one way to let us say deploy a common policy for all retail whether it is online or offline because yesterday in our conversations you seemed to indicate that there is no need for a common policy.

Krishnan: Let me be clear. One, at the top line what has been said by RAI that FDI in retail should be allowed omni-channel across channels. I completely and fully support that.

Two, I do not support the fact that the marketplaces is a matter of convenience. They conveniently structured for this particular purpose because there are true marketplaces.

Three, I don’t necessarily agree that there needs to be a common policy but on the top level petition that there should be FDI in retail both brick and mortar and eCommerce and omni-channel.

Doshi: So, what should be the distinction between the policy that applies to brick and mortar and the policy that applies to online?

Krishnan: No, it is completely fine to have the same policy but it need not be so. Just in order to meet your requirements of offline you are trying to drag in eCommerce is not correct.

Doshi: On the one hand you have the government meeting with E-commerce players and asking for their thoughts on FDI and E-commerce which doesn't necessarily mean anything will come out of it. But at least there is one meeting and now I think promise of few more. On the other hand you have the very same government saying look our position all along has been no FDI in brick and mortar and then you have the Delhi high court telling you all now please address this to the government and why don't the two of you sort it out. What's going to happen next?

BIG BOX vs DOT COM!
 "…the way in which they (ecommerce) need FDI, they may not need FDI, is it affecting the level-playing field of the the brick and mortar stores. All these are being discussed."

-          Nirmala Seetharaman

Commerce & Industry Minister

14 May, 2015

BIG BOX vs DOT COM!
“Let’s be very clear. What the DIPP did was publish the existing policy and so far what was decided by the UPA is continuing, the fact that the BJP was never in favour of this decision is publicly known.”

-          Arun Jaitley

Finance Minister

19 May, 2015  

Rajgopalan: So in the first place when the government did talk about this to be fair to the government they asked everybody to come in so it is not as if the government kept anybody out. So the government also I think within their own departments they understand that this is not debate about whether it is FDI for one or FDI not for others. Because they do realize that it is retail. However, for whatever be the composition they can't come out of this fact currently that they have stated that they do not want FDI in retail to happen. There is a way forward on this if they are going to get stuck in this; I will not allow FDI in retail at all. They need to define retail; they need to define the market place.

Doshi: Redefine the market place model to mean what, to do what, to shut down who?

Rajgopalan: To do that it's a business to business model very clearly.

Doshi: Shut down any selling to consumers?

Rajgopalan: Absolutely, they should not be allowed to participate in the way they are discounting, which mean they should not be paying the discounts, why should they be pricing.

Doshi: We are at the end of our time. I think we understand that this as much about legal pain, as it is about business pain and the discounting is a real big pain point here. Last 10 seconds to you.

Parekh: I think we all have to look forward not backward so it is not by curbing the policy further for eCommerce. I think in the interest of the country we need to overlook, have a complete overhaul of the policy. But that doesn't mean that we add conditions. I just want to say that, I think it has to be towards relaxation and not really added conditions.

 
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