Will Amazon, Flipkart be able to find a way around new e-commerce rules?

The government’s decision to tighten regulations with regard to sellers on e-commerce platforms is likely to hit the sector hard, with the business models of giants Flipkart and Amazon directly in the firing line.

On Wednesday, the Department of Industrial Policy and Promotion (DIPP) had issued new norms barring e-commerce firms from selling products through companies in which they own stakes. The move was aimed at clamping down on firms who operate on an inventory-based model where affiliated sellers account for the majority of sales.

E-commerce companies such as Paytm Mall, Snapdeal and ShopClues operate as pure-play marketplaces, where they merely serve as a platform for buyers and sellers without storing goods.

Amazon and Flipkart, on the other hand, have affiliated sellers and joint ventures (JV) via which they sell a large chunk of goods on their respective platforms. They also often deploy a strategy of deep discounting which has drawn the ire of small sellers.

Flipkart, however, is believed to have gradually reduced dependence on big sellers like WS Retail and OmniTech Retail. The ownership structure of these entities is not clear.

According to a section of industry observers, besides striking a blow to the large JV-seller entities, some of the other rules such as prohibiting e-commerce entities from striking exclusive deals with brands and manufacturers will suppress vendor autonomy.
 
According to Anil Talreja, partner at Deloitte India, the new norms will force such companies to restructure their JV seller entities.
 
“The guidelines clearly say that you cannot have an entity which controls inventory and controlling pricing through the marketplace. Going forward, there could be contracts and tie-ups but not ownership,” he added.

Likewise, the move which places the burden of fulfilling warranty and post-sale problems such as defective products, refunds and return on the seller could significantly impact customer satisfaction.

Experts say that Flipkart and Amazon had largely made these processes hassle-free by taking on those responsibilities.

“For example, the B2B wholesale procurement operations, which enabled the likes of Flipkart and Amazon to be involved in their own platforms, will be significantly compromised as a result of this new change,” said Vaibhav Kakkar, partner, general corporate & regulatory practices at law firm L&L Partners. “The new ruling deems a seller as an inventory-driven seller if more than 25% of purchases of such vendors are from the marketplace entity or its group companies.”

Flipkart and Amazon both have wholesale arms which sell goods to vendors on their platforms on a B2B basis.

According to Atul Pandey, partner at legal firm Khaitan & Co, until and unless there emerges a clarity on  how control on inventory is exercised, DIPP is likely to interpret it expansively. 

An Amazon spokesperson told TechCircle that the company was still evaluating the guidelines while Flipkart did not respond to queries till the time of publishing this report.

Regressive move?

Some industry observers feel that the government’s decision is ill-conceived and difficult to execute.

Arvind Singhal, chairman and managing director at retail consultancy and research firm Technopak, likened the norms to the FDI policy for retail, which was conceptualised around 15 years ago for the first time but has always been steeped in confusion and ambiguity.

“This is a convoluted change in an already convoluted policy… neither does it benefit the consumer nor is it practical to implement,” Singhal said.

One argument is that e-commerce companies have invested significantly to form these joint venture seller-entities in order to adhere to the existing DIPP rules.

“The new ruling neither helps the e-commerce market nor is it customer friendly,” said Satish Meena, senior forecast analyst at Forrester. “Ultimately, the goal of the regulatory authorities is to provide consumers with the best possible goods at the best possible price and the new move does neither.”

The move is also being in some quarters as a political ploy to pacify small sellers who earlier bore the brunt of policy decisions such as demonetisation and the Goods and Services Tax (GST).

A lot is at stake given the billions that have been pumped into the Indian e-commerce sector. While Walmart’s $16 billion buyout of Flipkart this year was the biggest in-bound acquisition in the country, Amazon has invested nearly $5 billion since entering the country five years ago.

“Not only global players, but some Indian industry stalwarts like Narayana Murthy are also involved in e-commerce,” Meena added. 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 Murthy.

Options on the table

Industry observers feel that while e-commerce companies are bound to make multiple representations to the government on this matter, they could also explore workarounds.
 
“The guidelines are silent on indirect equity participation of the e-commerce marketplace entity in the sellers (through an Indian-owned and controlled subsidiary). Therefore, the language of the clarifications is still open to interpretation,” said Khaitan & Co’s Pandey.
 
Some options may include restructuring their existing joint ventures and striking deals directly with manufacturers. However, it may be easier said than done.

“At great cost and with a significant operational risk, there can be non-equity arrangements with multiple large vendors. However under the new rules, the statutory auditor will have to sign off on such arrangements and also certify that there is nothing unfair or discriminatory in the dealings with vendors in similar circumstances,” said Avimukt Dar, partner at legal firm Indus Law.

Likewise, while manufacturers are free to sell directly on the platforms, direct sales on e-commerce sites may impact their global supply chain model and is something that needs to be examined on a case-by-case basis for feasibility, he added.

According to L&L’s Kakkar, e-commerce companies could also explore options such as contributing towards a more inclusive ecosystem.

“While the likes of Amazon and Flipkart will continue to flourish, one possible option would be to empower these smaller sellers by enabling and facilitating access to credit on favourable terms in a way where these sellers can directly buy from manufacturers, and add the customer experience,” Kakkar added.

Room for modification?

According to Technopak’s Singhal, DIPP will likely issue more modifications and changes before the February 1 deadline it has set for implementation. He based his assumption on past experience, citing examples of the FDI policy for retail and the draft e-commerce policy which have undergone several changes since first being introduced.

“It is possible that there will be further clarifications,” Indus Law’s Dar said. “The key drivers of such clarifications will likely be the marketplaces themselves, since they appear not to have been formally consulted.”

However, another industry observer said that given the political factors possibly at play, the government is unlikely to have a change of heart in the near future.

“Any dilution in rules before the general elections in April-May might not be possible,” said the observer who did not wish to be named. “However, it could very likely lead to an extended timeline for the e-commerce companies to adhere to the new regulations.”

Meanwhile, the government will announce a new draft policy for e-commerce in a few weeks, a source in the government told Reuters on Thursday,. The new e-commerce policy could entail provisions for a regulator in the sector and encompass issues including data localisation, taxation, as well as predatory pricing and other respects.