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What new FDI guidelines mean for the e-commerce ecosystem

Varsha Bansal &
The new FDI guidelines that will come to effect from February are stricter in nature, causing companies such as Amazon India and Flipkart to go back to the drawing board

Last week saw the government launching stricter guidelines that govern foreign direct investment (FDI) in e-commerce firms. The DIPP updated Press Note 3 that provides guidelines on the functioning of an e-commerce marketplace. The guidelines that will come to effect from February are stricter in nature, causing companies such as Amazon India and Flipkart to go back to the drawing board. Mint takes a look at how the ecosystem may get impacted with the updated guidelines.

1. What are the changes to the FDI norms covering e-commerce?

The revised FDI policy issued last week explains certain principles laid down in a 2017 circular on the operations of online market places, wherein 100% foreign direct investment, or full foreign ownership is allowed.

The new norms bar exclusive tie-ups between e-commerce firms that follow the ‘marketplace model' and vendors using their platform. In a marketplace model, the e-commerce firm is not allowed to directly or indirectly influence the sale price of goods or services, and is required to offer a level playing field to all vendors.

To emphasise this point, the new norms said cashback or services, such as quick delivery, offered by e-tailers have to be applicable to all vendors on their platforms. It also said that if a vendor sells more than 25% of its wares through an e-commerce marketplace, the latter will be deemed to have an inventory model, in which FDI is not allowed. The 25% cap was there earlier, but the onus of ensuring it, is now firmly on the e-commerce platform, so that it does not find itself on the wrong side of the law. It further said that e-commerce firms will be barred from selling wares of related parties on the inventory, of which it has a say.

2. Why are these changes significant?

Offline traders have been complaining that e-commerce platforms with access to FDI are able to give deep discounts and other incentives through related-party vendors, which they cannot match.

The changes are significant as its enforcement will affect the flexibility that e-commerce platforms had in doing business, and force them to be neutral to all vendors. The move appeases the trading community, a big constituency of the ruling BJP, ahead of the national polls early next year.

3. What does the government say about the revision?

Government officials insist that the changes in e-commerce FDI norms are clarificatory in nature and are not new restrictions.

4. How does this impact e-commerce firms?

E-commerce companies, such as Amazon and Flipkart, have been luring customers with deep discounts and exclusive offerings. The bar on such firms ‘influencing' pricing and mandating vendors to sell exclusively on their platforms may have a major impact on customer behaviour. Most customers shop online for deep discounts and exclusive offerings, which may not be available on other online platforms, or in offline stores. This will, in turn, have an impact on the revenue and growth of e-commerce companies in India.

This clause will also have an impact on private labels being sold by e-commerce companies. Over the last few years, companies such as Flipkart, Myntra and Amazon India, among others, have been introducing private label/in-house brands to garner more customers through exclusive offerings at lower costs and higher margins, so that their path to profitability is shorter and smoother.

The profitability target of these companies may now take a big hit. Also, the bar on e-commerce companies from selling products from entities they have a stake in, could affect Amazon because it has a stake in its two major seller entities, Cloudtail and Appario.

5. How will e-commerce firms cope with it?

E-commerce companies claim they have not been consulted before the policy was updated. Some expect Amazon to offload its equity in Cloudtail and Appario to continue using those seller entities.