Will New FDI Guidelines Put Ecommerce Companies Back to The Drawing Board?

Last week witnesses the government launching stringent guidelines which govern foreign direct investment (FDI) in e-commerce businesses. These new guidelines have created a furore among firms in the ecommerce sector and their vendors alike. Here’s a low-down on the new rules:

  • FDI Norms Covering E-Commerce – What Are The Changes?

One of the new clauses said – “An entity having equity participation by ecommerce marketplace entity or its group companies, or having control on its inventory by ecommerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity,” – This effectively prohibits any entity related directly or indirectly from selling on a platform.

“With the new norms, Cloudtail can’t sell on Amazon. It can’t be given favourable terms for warehousing or logistics,” said an expert on investment issues, requesting anonymity.

Another addition to the policy tightens inventory-based provisions – “Inventory of a vendor will be deemed to be controlled by ecommerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies,” it said – This will prevent any brand or supplier aligning exclusively with one marketplace, as is usually the case with mobiles or white goods.

The third major change in the policy said that ecommerce marketplaces or entities in which they have direct or indirect equity participation or shared control have to provide services to vendors on the platform at arm’s length and in a fair and non-discriminatory manner. This could put to an end selective promotional schemes such as cashbacks or faster delivery, which will be deemed unfair and discriminatory under the new policy. “Such services will include but not (be) limited to fulfilment, logistics, warehousing, advertisement/marketing, payments, financing, etc. Cashback provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory,” it said. “If there is a logistics company within the parent company, it cannot operate free of cost,” said an expert. “It will have to be treated in the same way as others.”

  • Why Are These Changes Significant?

 For long, offline traders complained that e-commerce platforms are able to provide deep discounts and other incentives through related-party vendors with the access. Something that they are unable to match.

The changes are important as its implementation affects the flexibility which e-commerce platforms enjoy in doing business.

  • How Does This Impact E-Commerce Firms?

Impact On Revenues

E-commerce companies, like Amazon and Flipkart, have been tempting customers with exclusive offerings and deep discounts. The restrictions on such firms ‘influencing’ pricing and mandating vendors to sell solely on their platforms can have a huge 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 effect on the revenue and growth of e-commerce companies in India.

Impact On Private Labels

The clause will also impact private labels being sold by e-commerce companies. Companies like Flipkart, Myntra and Amazon India have been introducing their private label/in-house brands to reap more customers through exclusive offerings at lower costs and higher margins.

Impact On Major Selling Entities

The new rules could hurt the Indian arm of American e-tailer Amazon the most, as Cloudtail India, a 49:51 joint venture between Amazon Asia and NR Narayana Murthy’s Catamaran Ventures, is the largest seller on its platform. Appario Retail, a joint venture between Amazon Asia Pacific Holding and the Patni group, is also an exclusive seller on Amazon India.

Will Discounting Completely Go Away?

Despite the current restrictions proposed to be imposed in the revised FDI policy, price discounts per se is not expected to go away completely, though some rationalization in discounts is expected. The prevailing FDI norms for the marketplace model for e-commerce also prohibit discounting. Despite this, disparity in pricing in the online and offline retail modes exists. Monitoring of the preferential services (logistics, warehousing etc.) being provided to a particular vendor can be challenging. Also, indirect control over inventory through step-down ownership structures can’t be ruled out.

Even in a situation of complete price parity between offline and online retailers, the ease and convenience of search, comparison and order placement from a wide variety of products would remain a key advantage for e-commerce players. Greater choice and a large variety of goods are available to the consumers at the click of a mouse in the online channel, which additionally offers convenient return/exchange policy. Favorable demographics of India with a young population, increasing penetration of smartphones and the internet also augur well for the prospects of the online retail industry in India.

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