Changes in FDI e-comm policy

In a major jolt to Walmart’s $16-billion acquisition of Flipkart and Amazon’s $5-billion bet on India, the government announced changes to the foreign direct investment policy for the e-commerce sector that could trigger a shakeup in the way leading platforms such as Amazon and Flipkart conduct business in the country. The move should mollify brick-and-mortar retailers, which have had a longstanding grievance against e-commerce sites for offering discounts to win over customers.

A new rule inserted in the policy bars any entity related to e-commerce platforms from selling on that site and imposes a limit on how much one vendor can sell on a particular portal. The policy also prohibits e-commerce platforms from giving any preferential treatment to any supplier.

Cashbacks, exclusive sales, brand launches, preferential services or programmes such as Amazon Prime and Flipkart Plus could run into difficulties under the new dispensation that seeks to ensure that these platforms are truly impartial marketplaces. Entities such as Cloudtail, in which Amazon has a stake, will likely not be able to sell on the platform. Flipkart’s new owner Walmart may itself not be able to sell on the website.

The new framework will come into force on February 1, 2019, said the Press Note issued by the Department of Industrial Policy and Promotion detailing the changes on Wednesday. The government is also working on a separate e-commerce policy for which inter-ministerial consultations have started.

Brick-and-mortar businesses are set to be big gainers from the changes.

Traders have complained that e-commerce entities were distorting the market by sourcing and selling goods on their own platforms, violating the policy that disallows foreign direct investment in business-to-consumer e-commerce. It allows 100% FDI in business-to-business e-commerce.

“An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity,” said one of the new clauses. This effectively prohibits any entity related directly or indirectly from selling on a platform.

“With the new norms, Cloudtail can’t sell on Amazon. It can’t be given favourable terms for warehousing or logistics,” said an expert on investment issues, requesting anonymity. Amazon India’s largest seller, Cloudtail, is a JV between NR Narayana Murthy’s Catamaran Ventures and Amazon. Another addition to the policy tightens inventory-based provisions. “Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies,” it said.

This will prevent any brand or supplier aligning exclusively with one marketplace, as is usually the case with mobiles or white goods.

The third major change in the policy said that e-commerce marketplaces or entities in which they have direct or indirect equity participation or shared control have to provide services to vendors on the platform at arm’s length and in a fair and non-discriminatory manner. This could put to an end selective promotional schemes such as cashbacks or faster delivery, which will be deemed unfair and discriminatory under the new policy.

“Such services will include but not (be) limited to fulfilment, logistics, warehousing, advertisement/marketing, payments, financing, etc. Cashback provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory,” it said.

“If there is a logistics company within the parent company, it cannot operate free of cost,” said an expert. “It will have to be treated in the same way as others.”

Snapdeal CEO Kunal Bahl welcomed the move. “The update to the FDI policy on e-commerce will ensure balanced growth of India’s e-commerce industry, creating lasting gains for both sellers and buyers. FDI in marketplaces is meant to enable growth of India’s MSMEs and these changes will help create a level playing field for all sellers.”

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