Explained: How e-commerce policy moves could shake up the sector

Months after being put on ice, the draft e-commerce policy appears set for a comeback. 

The government had proposed a regulatory framework for the likes of Walmart-owned Flipkart and Amazon India in July last year before shelving it two months later after various stakeholders raised concerns about some of the provisions. 

Now, the policy is being reworked by a group of bureaucrats headed by the secretary of the Department of Industrial Policy and Promotion (DIPP), the designated body for all matters related to e-commerce. A government official recently said that a new draft would be issued in a few weeks. 

Separately, the government last week tweaked regulations related to foreign direct investment (FDI) in e-commerce that would in effect require the top players to overhaul their business models. Given that India’s two largest online retailers are foreign-owned and have both pumped in billions of dollars, a lot is riding on the government’s policy decisions.

Here’s a closer look at the recent regulatory moves and their ramifications: 

Why does the government want to introduce a national e-commerce policy?

The policy aims to protect small traders selling on e-commerce platforms and provide a level playing field for Indian e-commerce companies such as Snapdeal and ShopClues which work on a marketplace model — where they serve only as a platform for buyers and sellers without storing inventory. 

It was argued by trade bodies that small traders on marketplaces were ignored by the e-commerce giants such as Flipkart and Amazon in favour of their subsidiaries which received benefits such as low marketplace fee and preferential logistics, among other sops.

What did the initial version of the draft e-commerce policy propose and why was it abandoned?

The policy in its previous form came in for criticism from various quarters for insisting on storing data locally, setting up an e-commerce regulator and a preference for the government-backed RuPay card. Trade bodies also objected to a proposal allowing 49% FDI in inventory-based business-to-consumer retail, which is currently prohibited. 

What were the recent rule changes introduced by the DIPP?

The DIPP had issued Press Note 3 in 2016 which permits 100% FDI  in business-to-business (B2B) e-commerce and bars FDI in business-to-consumer (B2C) online retail. It also specified that online e-commerce platforms cannot directly or indirectly influence the price of goods and a single vendor cannot account for more than 25% of sales on the platform.

Last week, the DIPP issued a clarification to the Press Note 3 which stated that subsidiaries of e-commerce marketplaces or entities in which the e-commerce platforms have an equity shareholding cannot sell on the platform with effect from February 1, 2019.

In addition, it said that online marketplaces cannot have control over inventory. The new rules consider the inventory of a vendor to be controlled by a marketplace if more than 25% of its purchases are from a marketplace entity.

Who does this affect?

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.

Flipkart and Amazon both have wholesale arms which sell goods to vendors on their platforms on a B2B basis. They sell a large chunk of these goods on their respective platforms through joint ventures and affiliated sellers. 

For instance, 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.

The DIPP’s new rules effectively make Cloudtail’s existence illegal with effect from February 1.

What do the new rules say about private labels?

An additional clarification issued by DIPP also mentions that the recent clarification was to ensure that the rules of Press Note 3/2016 are not circumvented. FDI in other sectors continues to be governed by specific policies. 

It mentions that 100% FDI in food retail continues, including through the e-commerce channel for products manufactured or produced in India. 

This provides necessary clarity to Amazon India's food retail ambitions.