Q. With reference to foreign-owned e-commerce firms operating in India, which of the following statements is/are correct?

  1. They can sell their own goods in addition to offering their platforms as market-places.
  2. The degree to which they can own big sellers on their platforms is limited.

Select the correct answer using the code given below:

  • 1 only
  • 2 only
  • Both 1 and 2
  • Neither 1 nor 2

Answer: (b) 2 only

FDI Policy in India
  • The FDI Policy prohibits retail trading in any form through e-commerce for the companies with FDI engaging in the activities of multi-brand retail trading. Multi-brand retail trading means selling different products of various brands through one platform. India has not allowed FDI in inventory-driven models of e-commerce. The inventory model, which Walmart and Amazon use in the United States, is where the goods and services are owned by an e-commerce firm that sells directly to retail customers. The restriction is aimed largely at protecting India’s vast unorganized retail sector that does not have the clout to purchase at scale and offer big discounts.
  • India amended its FDI policy in e-commerce marketplaces in 2018 to classify any vendor accounting for more than 25% of the platform’s total sales as “controlled” by the marketplace operator. So, no seller must exceed 25 per cent of the total business on any foreign e-commerce platform.
Foreign Direct Investment
  • A Foreign Direct Investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.
    • FDI lets an investor purchase a direct business interest in a foreign country.
    • In FDI, the foreign entity has a say in the day-to-day operations of the company.
    • FDI is not just the inflow of money, but also the inflow of technology, knowledge, skills and expertise/know-how.
    • It is a major source of non-debt financial resources for the economic development of a country.
    • FDI generally takes place in an economy which has the prospect of growth and also a skilled workforce.
  • Investors can make FDI in a number of ways.
    • Some common ones include establishing a subsidiary in another country, acquiring or merging with an existing foreign company, or starting a joint venture partnership with a foreign company.
  • Apart from being a critical driver of economic growth, FDI has been a major non-debt financial resource for the economic development of India.
  • It is different from Foreign Portfolio Investmentwhere the foreign entity merely buys stocks and bonds of a company.
    • FPI does not provide the investor with control over the business.
  • Routes of FDI:
    • Automatic Route:
      • In this, the foreign entity does not require the prior approval of the government or the RBI (Reserve Bank of India).
      • In India FDI up to 100% is allowed in non-critical sectors through the automatic route, not requiring security clearance from the Ministry of Home Affairs (MHA).
        • Prior government approval or security clearance from MHA is required for investments in sensitive sectors such as defence, media, telecommunication, satellites, private security agencies, civil aviation and mining, besides any investment from Pakistan and Bangladesh.
    • Government Route:
      • In this, the foreign entity has to take the approval of the government.
        • The Foreign Investment Facilitation Portal (FIFP) facilitates the single window clearance of applications which are through approval route. It is administered by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.