The country’s largest online retailers are struggling to comply with the revised guidelines on foreign direct investment in the sector, while sections of the industry are calling for regulations that provide incentive for growth within a broader national framework.
On December 26, the central government reiterated its stand on disallowing e-commerce entities from owning or controlling the inventory sold on their platforms. It clarified that any vendor would be deemed as controlled by a marketplace if more than 25% of that vendor’s sales came from the marketplace or its group entities. It also said any vendor having equity participation by an e-commerce marketplace or its group entities would not be permitted to sell on the same marketplace.
No one saw these radical changes coming, least of all American retail behemoth Walmart, which just months earlier had pumped in $16 billion to acquire 77% stake in homegrown e-commerce marketplace Flipkart. Amazon, the world’s largest online retailer which has invested nearly $5 billion in the country since 2013, will also be affected by the change in rules, having to give up its investments in sellers Cloudtail and Appario, its joint ventures with wealthy family offices.
Profitability is still a far cry for these cash-guzzling e-commerce players and the new rules — due to be enforced from February 1 — may further delay it.
“It appears as though companies like Amazon and Flipkart will not be able to sell private labels…associated with much higher profit margins for companies and one of the key strategies to get to profitability,” said Kartik Hosanagar, professor of operations, information and decisions at the University of Pennsylvania’s Wharton School.
While the government’s move has put a huge roadblock for the two biggies, a section of the industry said Amazon and Flipkart have been “abusing their power” by using an inventory model, setting up wholesale arms, and selling goods to these preferred sellers while pushing their private label business.
Call For Self Regulation
“The surmise that there have been multiple policy changes for the online retail sector is incorrect. India’s policy has been consistent in allowing 100% FDI in business-to-business e-commerce and consistent in denying FDI in business-to-consumer e-commerce,” said Kunal Bahl, cofounder of Snapdeal, a pure-play online marketplace that is not affected by the new rules.
He said the sector’s growth will be best served by light-touch regulation that allows flexible growth within clear and broad national policies. “The existing regulation is adequate and needs to be implemented promptly and consistently,” Bahl said. “For all operational matters, the sector needs to step up with self-regulation and industry best practices for pure marketplaces. This will balance the interests of all stakeholders — buyers, sellers and marketplaces — without the need for the government to micromanage the sector.”
Bulk of the resistance to the rise of e-commerce has come from offline retailers, especially smaller retailers, who have cheered the government’s recent move.
But experts warn that their sense of security could be misplaced. “If a (online) marketplace is to be purely a technology platform, who does it benefit? The small seller will not benefit, because if it’s not e-commerce, then it’ll be the large format retailer that will eat the small sellers,” said a former vice president at Flipkart.
A senior executive at an online retail firm said, “With elections round the corner, there is no certainty on any of this framework.”
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