The government Wednesday announced new e-commerce rules restricting players from selling the products of companies in which they have a stake, and capping the percentage of inventory that a vendor can sell through a marketplace entity (IT platform of an e-commerce entity) or its group companies. To curb the practice of deep discounts, the government said they cannot directly or indirectly influence the price of goods and services, and also brought in a new set of rules that bar the sale of products exclusively in one marketplace. What are the new rules, and what do they means for companies, vendors and customers?
What has changed?
From February 1, 2019, e-commerce companies running marketplace platforms — such as Amazon and Flipkart — cannot sell products through companies, and of companies, in which they hold equity stake.
While foreign direct investment is not permitted in the inventory-based model of e-commerce, the clarification put a cap of 25% on the inventory that a marketplace entity or its group companies can buy from a vendor. “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,” the statement said.
How will Amazon and Flipkart be impacted?
Industry experts say the changes will have a significant impact on the business model of e-commerce majors, as most of them source goods from sellers who are related party entities. “Going forward, the suppliers will not be permitted to sell their products on the platform run by such marketplace entity. This will impact backend operations, as Group entities would have to be removed from the e-commerce value chain. The time has now come to look at franchise channels, rather than equity investments channels, to do business in India,” Rajiv Chugh, National Leader, Policy Advisory & Speciality Services, EY India, said.
Also, e-commerce players like Amazon and Flipkart, who have their private labels, will not be able to sell them on their platforms if they hold equity in the company manufacturing them.
However, some experts feel that a degree of leeway may still be available to 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,” Atul Pandey, partner at Khaitan & Co, said.
Who are the big marketplace retailers who may be impacted?
Cloudtail India Pvt Ltd is the biggest retailer operating on Amazon, while WS Retail was the biggest seller on Flipkart. Cloudtail’s ownership shows a clear link with Amazon. Incorporated in October 2011 as Sparrowhawk Sales and Marketing, its name was changed to Cloudtail India in August 2012. Prione Business Services holds 99.99% stake in Cloudtail. Prione is a joint venture between Amazon Inc. and Infosys co-founder N R Narayana Murthy’s Catamaran Advisors. Catamaran holds 51% stake in Prione, Amazon Asia Pacific Resources owns 48%, and the remaining 1% is owned by Amazon Eurasia Holdings.
Another retailer that may be impacted is Appario Retail, which is a wholly owned subsidiary of Frontizo Business Services. Frontizo is a joint venture between Amazon India Ltd and Ashok Patni, the co-founder of Patni Computer Systems. Frontizo’s latest filings with the Registrar of Companies shows that Amazon Asia Pacific Holdings owns 48% stake in the company, and Zodiac Wealth Advisors holds 51%. The remaining 1% is with Zaffre LLC, based in Delaware, United States.
Under the new rules, Cloudtail and Appario, in which Amazon holds equity stake, may not be able to sell products on Amazon’s e-commerce platform.
What else has changed?
The government has said that e-commerce entities will have to maintain a level playing field, and ensure that they do not directly or indirectly influence the sale price of goods and services. The policy mandates that no seller can sell its products exclusively on any marketplace platform, and that all vendors on the e-commerce platform should be provided services in a “fair and non-discriminatory manner”. Services include fulfilment, logistics, warehousing, advertisement, payments, and financing among others.
How are consumers and small retailers likely to be impacted?
Consumers may no longer enjoy the deep discounts offered by retailers that have a close association with marketplace entities. The absence of large retailers will, however, bring relief to small retailers selling on these platforms. Traders running traditional brick-and-mortar stores, who now find it difficult to compete with the large e-commerce retailers with deep pockets, could gain.
Kunal Bahl, co-founder of Snapdeal, welcomed the changes. “Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs (Micro, Small & Medium Enterprises). These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce,” Bahl posted on Twitter Wednesday.
Praveen Khandelwal, secretary general, Confederation of All India traders (CAIT) also welcomed the decision to tighten FDI norms and called for forming a regulatory authority to check flouting of e-commerce rules. Asking the government to come with an e-commerce policy soon, he said that small vendors should get enough chances to participate in the online business.