Tuesday, 2 June 2015


Threatened by the rapid growth of online shopping, the country's top brick and mortar retailers or offline retailers have dragged the Central Government to Court, demanding level playing field in FDI norms vis-a-vis e-commerce players.

Retailers Association of India (RAI), which represents about 900 retailers with 1.72 lakh stores including top retailers such as Future Group, Shoppers Stop and Reliance Retail, moved the Delhi High Court against the Union Government.

Justice Rajiv Shakdher on May 20, 2015 directed RAI to take their complaints against online shopping sites to the government and if no action is taken within 4 months, they can return to the Court.

The Bone of Contention

The e-commerce sites are able to offer attractive discounts and offers to their customers owing to the backing of billion dollar investments received from Indian and foreign capital firms. Along with the pouring investments even the Indian buyers are now increasingly getting comfortable with online shopping.

Large offline retailers are therefore finding it difficult to compete with the prices offered by the online sites, especially in case of electronics and gadgets, where online retailers now command nearly 20 percent of all sales.[1] Physical retailers, which pay hefty rentals and have other establishment costs, say it's extremely difficult for them to compete with online retailers.
According to existing FDI rules for online retailers, foreign investments are only permitted in business-to-business (B2B), or wholesale and not in retail trading. In wholesale e-commerce, the government allows up to 100% FDI. FDI in B2C or business-to-consumer e-commerce is not allowed. But it is contended by RAI that the online retailers have found a way around this.

As for offline retail, in 2012, the government allowed foreign investors to hold up to 51% in multi-brand chains in India. However, this investment was subject to constraints such as sourcing criteria, among others.[1]

Demands of RAI

“We are demanding parity” said lawyer Abhishek Manu Singhvi, who represents the country’s largest lobby of organised retailers, RAI. The petition seeks a level playing field with online retailers on foreign direct investment (FDI) rules. The latter are allowed 100 per cent FDI as most of them are run on the marketplace model, providing a platform for vendors. Multi-brand retailers on the other hand are eligible for 51 per cent FDI, based on whether the state allows it or not.

Response by E-Commerce Companies

The online retailers assembled under the E-Commerce Coalition of India appear to be divided on the issue of FDI. While many online stores are demanding opening up India's ecommerce sector to 100% FDI, the larger online marketplaces such as Flipkart and Snapdeal, which are also part of the coalition, are opposing such a move.

E-commerce firms argue that it is them who are at a disadvantage. Mr. Jariwala of ECI was quoted by the Economic Times on May 26, 2015 saying “While the current multi-brand retail trade policy allows 51% FDI and 100% for single brand, no such provision is allowed for B2C (business to consumer) ecommerce.”

Debate on Marketplace Model

There are essentially two models of doing B2C e-commerce. The first is the inventory model where the e-commerce portal stocks up all the items. The other type is the marketplace model. Here, the e-commerce portal does not hold any inventory. Instead, it brings the buyers and sellers together. The seller uses the website of the e-commerce portal and fulfills the order himself.

The website provides all the enabling services like tracking facility, payment gateways etc. But its job is no more than that of an agent. It hands over the sale proceeds to the supplier as per the agreement with him after deducting its service charges.

However, the brick and mortar retailers believe that the marketplace model adopted by ecommerce companies differs little from conventional methods. Mr. Biyani, founder of Future Group said “All retailers — whether real or virtual — source almost all goods from manufacturers and suppliers. Virtual retailers, like real retailers, store most of their merchandise or inventories in their own warehouses. In addition, in these so-called marketplaces, sellers do not directly interact nor ship goods directly to buyers. Like real retailers, virtual retailers themselves own or handle the logistics and customer delivery for everything that they sell.[2]

This debate on the meaning and scope of ‘marketplace model’ and whether it is applicable to the brick and mortar retailers sparked off as a result of the framework of the Consolidated FDI Policy, 2014[3] which bars FDI in any e-commerce venture that sells products directly to consumers but allows 100% foreign capital in the B2B model. To avail the 100% FDI cap, the e-commerce companies evolved and adopted the marketplace model, which allows them to set up platforms for other retailers to sell products.


This is the second tough tactic adopted by India's brick and mortar retailers against the government in the past few days. Earlier, the country's physical retailers had boycotted a meeting convened by the Ministry of Commerce and Industry to discuss FDI in e-commerce.

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