The New E-Commerce Policy: Big Discounts Out, Level Playing Field In; All You Need To Know

The Union government, on Wednesday (26 December), moved to provide clarity on the foreign direct investment (FDI) policy for the Indian e-commerce sector and made significant changes to the Consolidated FDI Policy Circular 2017.

The Issue

Massively disadvantaged local manufacturers and sellers. How?

Both Flipkart and Amazon, the big two of Indian e-commerce, allegedly undercut competition from local online sellers by creating subsidiary companies in which they held a substantial stake.

Ownership allowed these companies to buy/source goods in bulk and sell them at throwaway prices, which constituted a huge part of their overall online sales. Smaller manufacturers and sellers, unable to compete with the prices, were hence at a disadvantage, to the point of running out of business.

The huge offers and price discounts offered by Amazon and Flipkart, though beneficial to the consumers, resulted in enormous losses for the lakhs of small and medium traders. Offline Kirana stores have often repeatedly complained of diversion of sales to online stores.

The Solution

The new e-commerce policy aims to prevent this deception. One of the significant changes brought in by the government relates to holding and subsidiary companies, those which are partially or wholly owned by the online players.

“Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25 per cent of purchases of such vendor are from the marketplace entity or its group companies,” the government release noted.

What this means in essence is that foreign-based e-commerce firms like Amazon and Flipkart will no longer be able to access FDI if they hold inventory through subsidiary companies. The new rules will come into force on February 2019.

A Little Background

The circular also makes a clear distinction between ‘marketplace-model of e-commerce’ and ‘inventory-model of e-commerce’.

In the latter case, ‘inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.’

On the other hand, in the marketplace-model, the e-commerce entity just acts as a platform that facilitates transactions between buyers and sellers and holds no inventory.

Though the new rules still allow 100 per cent FDI in the marketplace-model of e-commerce, no FDI is permitted in the inventory-model.

For The Curious Mind

It should be noted that Flipkart’s holding company is based in Singapore and Flipkart’s investments in India, are hence termed as FDI. The same holds for Amazon, which is headquartered in the US. US-based retail giant, Walmart recently bought a controlling stake in Flipkart for $16 billion.

The new policy also disallows online players from engaging in Business to Consumer (B2C) e-commerce and restricts them to only Business to Business (B2B) e-commerce. In B2C, the e-commerce firm directly interacts with end consumers but in the B2B model, transactions take place between two firms or businesses.

Another significant change is that no e-commerce marketplace entity can force a seller to sell goods only on its platform.

Experts, however, are already suggesting that work-arounds the policy are possible.

Watch: India’s Draft E-Commerce Policy: What Has Got The Foreign Players Rattled?