Wholesale trade cap might not hit marketplace e-retail

But if online retailer owns inventory, it is likely to be covered by the latest rule

E-commerce companies following the marketplace model are unlikely to be hit by the department of industrial policy and promotion’s (DIPP’s) latest note on ‘group companies’. Such companies were defined in the context of the 25 per cent cap on wholesale trade, where foreign investment was involved.

Many big e-commerce players such as Snapdeal and eBay follow the marketplace model — they offer a platform to retailers to sell products, while retaining control over the billing and delivery. Recently, online retailer Flipkart, which was under a probe for violating foreign investment norms, switched to the marketplace model.

Many medium and small-sized online retail chains still operated as regular e-commerce companies, said Saloni Nangia, president, Technopak Advisors, a retail sector consultancy. “Depending on how an e-commerce company is structured, the latest DIPP order would apply on them,” said Nangia. The crucial question to ask is “who owns the inventory”, she added. If an online retailer or a service provider owned the inventory, it was likely to be covered by the latest rulebook.

Akash Gupt, executive director, PricewaterhouseCoopers, told Business Standard, “Anybody who has a marketplace model will not be subjected to the ‘group companies’ order. In case of the marketplace model, the company offering the platform is only a media, while the business of retail is conducted by the retailers operating in that space.

At least half a dozen leading e-commerce companies did not reply to questionnaires sent by Business Standard for this story.

Though foreign investment is prohibited in e-commerce companies, through the years, most companies have attracted international private equity funds. To circumvent the government policy of not allowing foreign direct investment, these e-commerce companies had two registered companies — one for back-end operations and wholesale, and the other for front-end retail. Foreign investment into these companies was routed through back-end companies, as there is no restriction on foreign investment in back-end and wholesale operations.