The Department of Industrial Policy and Promotion (DIPP) on Wednesday issued a set of additional guidelines for foreign direct investment (FDI) in the sector. Experts said this might not only curb the activities of e-commerce companies, but also prevent some of them, such as Flipkart, from raising any more FDI. The new regulations will take effect from February 1 next year, said the DIPP regulation.
There are, however, no penal provisions, which means the government will not be able to prosecute any e-commerce firm that falls foul of the latest regulations.
“Despite this, we expect the latest changes to have a cascading effect on the industry,” a senior DIPP official said. He added that these new regulations may find their way into the policy itself.
The DIPP is currently in the process of putting together a fresh draft of the proposed policy after the last one faced heat from both companies and civil society alike. The department has also prohibited e-commerce companies from entering into an agreement for exclusive sale of products.
“An entity having equity participation by an e-commerce marketplace entity or its group companies, or having control on its inventory by a e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such a marketplace entity,” the DIPP circular said.
Shadow on vendors
Industry experts said the new rules might put a stop on Amazon and Flipkart from selling products through vendors in which they have stakes. Amazon runs Cloudtail India and Appario Retail, possibly the largest vendors on its platform. Flipkart has other vendors, such as RetailNet and Omnitech Retail.
“The new clarifications have dealt a huge blow to the most existing structures operated by e-commerce entities by clarifying that an entity having an equity participation by a e-commerce marketplace or its group companies, or having control on its inventory by marketplace or its group companies, will not be permitted to sell its products on the platform run by the same company,” said Atul Pandey, partner, Khaitan & Co.
Cloudtail India, Appario Retail, RetailNet, and Omnitech Retail are few of the biggest sellers in India. At present, these firms are doing a large chunk of business even after the government came out with guidelines.
“As Amazon and Flipkart have stakes in these firms, it means the margins they make on selling products through these sellers are higher than what they would make from selling products from an independent seller. That is why they prefer using these vendors over others,” said Confederation of All India Traders Secretary General Praveen Khandelwal.
While Amazon India said they were reviewing the fine print of the new norms, Flipkart was not available for a comment.
The DIPP has also said the e-commerce firms cannot be choosy about giving cash backs through specific vendors and there needs to be parity in discounting. “Cash-back offers provided by the group companies of a marketplace entity to buyers shall be fair and non-discriminatory,” it said.
The road ahead
Soon, mobile phone companies might not be able to run exclusive flash sales on e-commerce portals.
The DIPP has said an e-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only.
“Flash sales, a common business model for most ecommerce entities, will also be restricted since an e-commerce marketplace entity cannot mandate any seller to sell any product exclusively on its platform. However, sellers may still choose to sell their products on one platform,” added Pandey.
He added that in order to keep a track of such compliance, a new compliance has now been introduced wherein it is now required to furnish a certificate along with a report of statutory auditor to RBI, confirming compliance of above guidelines, by September 30 of every year for the preceding financial year. This will ensure that RBI is completely aware of extent of compliance by the major e-commerce players.
Others claim the new FDI norms will help in creating a truly level playing field. “@Snapdeal welcomes updates to FDI policy on e-commerce. Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce,” tweeted Snapdeal founder Kunal Bahl.