E-commerce firms in a fix after govt issues new norms for vendors

E-commerce companies including market leaders Flipkart and Amazon were dealt a blow on Wednesday after the government barred them from selling products through companies in which they own stakes.

In a review of the Foreign Direct Investment (FDI) policy in e-commerce, the Department of Industrial Policy and Promotion (DIPP) has sought to tighten regulations around the inventory model, where such firms directly sell products to customers from their own inventories -- often at large discounts. 

In addition, existing regulations do not allow FDI in the inventory-based model of e-commerce. The DIPP has issued a clarification which seeks to address the issue of online retailers forming ‘innovative’ structures through joint ventures and subsidiaries.

The clarification states that: “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.”

This measures, which will come into effect on February 1, directly impacts the business of the likes of Cloudtail India and Appario Retail, which are sellers on Amazon India.

Amazon has developed these subsidiaries to run and manage its own inventory in partnership with local vendors. 

Cloudtail, one of the largest sellers on Amazon, is owned by a 49:51 joint venture between Amazon and Catamaran Ventures, the personal investment arm of Infosys co-founder Narayan Murthy. It had net sales of around $1 billion for the year ended March 2018.

Appario is a subsidiary of Frontizo Business Services Pvt. Ltd, a joint venture of Patni group (51%) and Amazon Asia Pacific Holdings (48%).

Industry experts have said that over 60% of Amazon’s sales in the US come from its inventory, while third-party sellers account for the rest. 

As DIPP regulations do not allow for this, it suits Amazon to enter into JVs with larger players to help it expand aggressively and give it more control over its inventory and sellers, which will translate into better margins and customer experience.

“Marketplace operators had done innovative structuring over the years in order to enhance business efficiency while conforming to FDI guidelines. Now with the new policy clarification, vendors selling more than 25% of products on a marketplace as well as investee companies cannot sell on the platform,” said Avimukt Dar, founding partner at IndusLaw.  

Like Amazon, rival Flipkart also has a captive seller in the form of WS Retail while group company Myntra’s largest seller is its distributor, Vector E-commerce.

“The current clarification clearly bars marketplace e-commerce entities from influencing price and creates a level playing field for sellers,” said Kumar Rajagopalan, chief executive officer at Retailers Association of India, a not-for-profit body of physical retail businesses.

“Also, models designed specifically for sale on e-commerce platforms by companies and barring sellers from selling on other platforms has been done away with,” he added. 

.@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. @rabhishek1982 @DIPPGOI https://t.co/tWojv3gXA7

— Kunal Bahl (@1kunalbahl) December 26, 2018

All India Online Vendors Association (AIOVA), a group of over 2,000 sellers on e-commerce marketplaces, said that the government was not looking at previous violations by the marketplaces.

“The government has washed away their past sins and formed a new policy,” an AIOVA spokesperson told TechCircle.

Industry observers said these measures could lead marketplaces to finance sellers indirectly instead of equity-based investing.

"This move is bound to bring in investor skepticism as it has created a certain sense of uncertainty," said Anil Joshi, managing partner at Unicorn India Ventures.

The development comes at a time when the government is working on a new draft of an e-commerce policy which will encompass data localisation, taxation, as well as predatory pricing and other respects.