On Tuesday, the government clarified its policy on Foreign Direct Investment (FDI) in e-commerce and online retail consumer businesses that operate as marketplaces. While this is expected to bring investment to the sector, several riders put by the Department of Industrial Policy and Promotion (DIPP) in the guidelines appear to threaten to derail the business model that has been adopted by most players in the field. The key guidelines and the impact they may have on stakeholders:
Is there a change in the FDI limit for marketplace?
No. 100% FDI was already allowed in the sector. Global players such as Amazon have invested through the same route, and homegrown marketplace biggies such as Flipkart and Snapdeal have witnessed huge investment inflows over the last few years.
There has, however, been a change in the stance on recognising marketplace as a business — the government has now defined marketplace as an e-commerce company acting as a facilitator between buyers and sellers by providing a technology platform on a digital and electronic network.
The government also expanded the scope of marketplace to include support services (to sellers) such as warehousing, logistics, order fulfillment, call centre, payment collection, and other services.
What restrictions have been imposed on marketplace platforms?
Over the last two years, marketplace platforms such as Amazon, Flipkart and Snapdeal have emerged as the preferred way for a large number of consumers to shop because of the great deals they offer — selling goods at prices much below the maximum retail price, and often significantly lower than the best price quoted by brick-and-mortar retailers. Tuesday’s guidelines, however, state clearly that “e-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field”.
How will this affect these platforms?
Industry insiders say the big discounts online are made available either through a large vendor/group company, or by forcing retailers on the platform to offer price cuts in return for a prominent display. “A part of the discount offered by the big retailers is subsidised by the company providing the marketplace platform, and thus they do influence the price directly,” said an expert. The new guidelines, if they result in fixing a floor price, will curb this practice, and might force a restructuring of the business model, experts say. Lower discounts might lead to thinner traffic on the web site, and lower sales volumes.
Are there any restrictions other than on the sale price?
Yes. The guidelines cap the quantum of sales that can be executed by a vendor or its group companies. “An e-commerce entity will not permit more than 25 per cent of the sales effected through its marketplace from one vendor or their group companies,” the DIPP has said. This too will limit the marketplace’s ability to offer huge discounts.
According to an industry insider, WS Retail, the single largest seller on Flipkart, currently accounts for 35-40% of sales on the platform, while Cloudtail India accounts for over 40% of Amazon sales. A year ago, their shares were even bigger — between 60% and 80%. As both marketplaces will now have to bring down sales by these large vendors to 25% of the total, they may no longer be able to cut prices to the same extent, experts say.
In a statement, the IT and BPO trade body NASSCOM said, “Restricting sales of a vendor to only 25% of the sales in the marketplace may prove to be restrictive, more so if the vendor sells high value items. The industry might face difficulties in case of sale of electronic items, where a vendor may be offering exclusive access to certain items or discounts.”
So does this mean the days of huge discounts online are over?
Consumers have been the biggest beneficiaries of the deep discounts available at marketplace platforms. And if the guidelines result in a reduction in these discounts, they will be the biggest losers.
And will the policy benefit the traditional brick-and-mortar retailers?
Traditional brick-and-mortar retailers — the physical shops — are indeed expected to gain from the government’s attempt to ensure a level playing field on selling prices. This is likely to see them become competitive once again, and lead to a revival in their business volumes.
What happens now?
E-commerce industry insiders complain that while Tuesday’s guidelines offer no benefits (the 100% FDI through automatic route was already available), they impose a set of restrictions on them. There is a feeling in the industry too that the language of the guidelines is such that it is open to interpretation, and may result in litigation. While the guidelines say, for example, that an e-commerce company providing marketplace services cannot directly or indirectly influence the sale price of goods or services and shall maintain a level playing field, experts feel there is ambiguity on what exactly constitutes a move to “directly or indirectly influence”.