In a move that may come as a major setback to e-commerce players, the Ministry of Commerce and Industry Wednesday said that e-commerce companies running marketplace platforms, like Amazon and Flipkart, cannot sell products on their platform through companies where they hold an equity stake.
“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,” said the ministry in a statement offering clarity on FDI Policy on e-commerce. The decision will come into effect from February 1, 2019.
As a result of this decision, retailers such as Cloudtail India may not be able to sell their products on the marketplace run by companies that have ownership in such retailers.
Mixed message: Curbs amid digital push
The revised guidelines further tighten changes announced in March 2016. Ostensibly aimed to protect domestic players and product price, the rules restrict e-commerce firms such as Amazon and Flipkart from selling products of companies in which they have a stake. These platforms may have some leeway given the equity holding in their Indian subsidiaries. The message is mixed: new curbs in the time of digital push.
While a source close to an e-commerce company said that “Amazon may have to sell its stake in Cloudtail India, in order to allow Cloudtail to sell their products on Amazon’s platform,” there are some who feel that there may be some leeway available with the companies. “These clarifications will have a major impact on the major e-commerce players since most of them primarily source goods from sellers who are primarily relevant to such e-commerce players. However, the language of the clarification seems to grant leeway (to a certain extent) to entities which are step down subsidiaries of the entity in which the e-commerce entity or its group companies hold equity. Nonetheless, these clarifications will definitely have major repercussions on the business model of such e-commerce players,” said Atul Pandey, partner at Khaitan & Co.
Kunal Bahl, co-founder of Snapdeal, welcomed the government clarification. “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,” said Bahl in a tweet.
Cloudtail India Pvt Ltd is a joint venture of Amazon Inc. and Infosys co-founder N R Narayana Murthy’s Catamaran Ventures that is among the largest sellers on Amazon India’s platform. It had posted a 27 per cent revenue growth in 2017-18.
In another decision, the government aimed to put a cap of 25 per cent on the inventory that a marketplace entity or its group companies can purchase from one vendor. “E-commerce entity providing a marketplace will not exercise ownership or control over the inventory i.e. goods purported to be sold. Such an ownership or control over the inventory will render the business into inventory based model. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies,” said the ministry statement.
As per the FDI policy on e-commerce sector, while 100% FDI under automatic route is permitted in marketplace model of e-commerce, FDI is not permitted in inventory based model of e-commerce.
In another setback, the government put to rest the practice of sellers selling their products exclusively on one marketplace. “e-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only,” said the government clarification.
Besides e-commerce marketplace entity will also be now required to furnish a certificate along with a report of statutory auditor to Reserve Bank of India, confirming compliance of all the guidelines by September 30 every year for the preceding financial year.
Over the past couple of years, e-commerce firms such as Amazon and Flipkart have been forced to change their legal structures because of FDI rules announced in March 2016 by the DIPP, which allowed FDI in online marketplaces even as it capped the contribution of a single seller to 25 per cent of the marketplace’s overall business.
Amazon has over the past few years reduced its reliance on Cloudtail and gets a bigger share of its overall revenues from other large sellers to comply with existing FDI rules.
Like Amazon, Flipkart has also reduced its reliance on WS Retail over the past two years and is reported to be working with other large sellers.