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03 Jan 2019

Bye-Bye to Offers and Exclusivities? E-com Players Face a Major Set-Back

The Department of Industrial Policy & Promotion (DIPP) released a Press Note on 26th December, 2018 (“Press Note”), which brought out major changes to foreign investment in E-Commerce Sector. The changes made, which have been slated to be brought into effect from 1st February, 2019, will trigger a significant shake-up for the major e-com players like Amazon and Flipkart.

To set the context for the change, it is pertinent to understand the background for the growth of e-commerce in India. Foreign Direct Investments (FDI) in the e-commerce sector was first permitted in India in 2000 for purely B2B e-commerce with certain conditions attached, primarily that, FDI was not permitted in B2C e-commerce. Subsequently, the Government opened the retail sector to foreign investment, although the restriction with respect to B2C e-commerce continued. The Government further liberalized the foreign investment in retail trading, in November 2015[1], by permitting a single brand retail trading entity to operate and undertake e-commerce activities.

With a view to attract further foreign investments in e-commerce platforms, in 2016, the Government brought-out distinction between the two models of e-commerce platforms, viz. the marketplace model and inventory-based model. In marketplace model, the e-commerce entity simply acts as a platform for the buyers and sellers to meet. Whereas, in inventory-based model, the inventory of goods sold on the platform is owned or controlled by the e-commerce entity. While FDI is permitted up to 100% under automatic route in marketplace model, FDI is still not permitted under inventory model.

Why the recent change under the Press Note?

In India, the major players like Amazon and Flipkart, though do not own the inventory by themselves, they have been providing a platform for their group companies (such as CloudTail and WS Retail) who owned the inventory.  With this structuring, the e-commerce entities remained under marketplace model but the inventory was owned through its group entities. With these big-guns offering eye-popping offers and discounts, the other vendors and the brick-and-mortar entities started facing heavy drain in their revenues. The primary purpose of this Press Note is to benefit and protect the small vendors and ensure a level-playing field to all.

The Key Changes Made and its Effect:

Some of the key changes which have been brought out by the Press Note are as follows:

  • Control over the Goods/Services: The e-commerce entity providing the marketplace cannot exercise ownership or control over the goods purported to be sold. Such control/ ownership over the inventory will render the business to be an ‘inventory- based model’. It is to be noted that, FDI is not permitted in inventory-based model of e-commerce.  For this purposes, inventory of a vendor will be considered to be ‘controlled’ by an e-com marketplace entity if in the event more than 25% of purchases of such vendor is from such market-place entity or its group companies. As such, an e-com marketplace player cannot have more than 25% of its purchases from a single vendor. Prior to this Press Note, an e-commerce entity was not permitted to have more than 25% of the sales value on financial year basis affected through its marketplace from one vendor or their group companies. With the Press Note, the Government has made the restriction more stringent by ‘deeming’ such purchase exceeding the 25% threshold to be an inventory-based model.

 

  • Equity Participation: An entity which has equity participation by an e-com marketplace entity / its group companies, or having control on it inventory by e-com marketplace entity/ its group companies is not permitted to sell its products on the platform run by such marketplace entity. As such, the group companies of big players such as CloudTail, WS Retail, Myntra etc. will face a major blow as such entities will now not be permitted to list its products on their marketplace.

Considering that the Government has not stated any minimum threshold requirement for such equity participation, a strict interpretation would also affect the small start-ups where these big players have made investments.

 

  • Level-Playing Field: Under the earlier provisions also the e-com entities were not permitted (directly or indirectly) to influence the sale price of goods and was required to maintain level-playing field. However, now the Press Note stipulates that the e-com marketplace entity or other entities in which e-com marketplace has direct or indirect equity participation or common control, should render services to vendors on arm’s length basis and in a fair and non-discriminatory manner. Further, cash-back provided by group companies of marketplace entities to buyers has to be fair and non-discriminatory. In order to avoid any favourable treatment being provided to group companies by these platforms, the Press Note states that provision of services to any vendor on terms which are not made available to other vendors in similar circumstances will be ‘deemed’ unfair and discriminatory.

 

  • Exclusivity has been removed: E-com marketplace entity cannot mandate any seller to sell any product exclusively on its platform.
Conclusion

The changes proposed are indeed very welcoming for the small vendors as it now promises better level-playing field for these entities. However, the restrictions placed would materially affect the business model of the major players such as the provision which bars companies in which the e-com platform has stake from selling its products on these platforms. In this regard, it is recommended that the Government would stipulate some benchmark for the equity participation restriction. Further, considering that a single brand retail trading entity operating through brick and mortar stores, is permitted to undertake retail trading through e-commerce, it is not clear whether the entity could sell its own product on its marketplace. Given that the Press Note is to come into effect from 1st February, 2019, the market is keenly awaiting some clarifications from the Government to clear the confusions brought out by the proposed changes, failing which we will have to wait-and-watch the fate of the players like Amazon and Flipkart as these entities will not be able to continue its operations with their present business model.

[1] Press Note No. 12 (2015 Series)

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