India’s e-commerce majors are looking at setting up a chain of subsidiaries that will allow them to create new vendors, after revised foreign investment rules barred their controlled entities from selling on the marketplaces.
Legal experts pointed out that Amazon and Flipkart, the two online retail giants that have spent billions in Asia’s third largest economy, would now have to create new vendors that do not fall foul of Press Note 2 — it bars equity participation by foreign-funded companies, or their respective group companies, in the sellers on their platforms — as well as the Companies Act.
While the structures are being worked out, there is an assumption that the two ecommerce majors will have to create, what is being described as, a “maze of companies” to work around the new rules that came into effect on February 1. This could take them months.
“This can be achieved through adopting alternative/multi-level structures. The new vendor that needs to be set up, and which can sell products on the marketplace, cannot have any equity participation by the marketplace or any of its group companies,” Atul Pandey, partner at law firm Khaitan & Co, told ET.
However, creating a multi-level structure will not be an easy task, given that the Indian Companies Act restricts companies from having more than two layers.
“The structure to be adopted should not only be in compliance with the new policy, Press Note 2, vis-a-vis equity participation through group companies, but at the same time, ensure that it should not fall under the restrictions of Section 186 of the Companies Act,” Pandey said.
Therefore, divesting their equity stakes in vendors to third parties is likely to be the first move by the ecommerce majors, which could also contemplate altogether deregistering the vendors from the marketplace.
Amazon, which has pumped in billions into India, a geography it has identified as the last relatively untouched frontiers of consumer retail, has already removed scores of products from its platforms, given those were being sold through vendors — Cloudtail and Appario — in which the Seattle-based giant held a stake.
Separately, Walmart-owned Flipkart, which had also lobbied hard to extend the deadline for the implementation of the new FDI rules, stated that significant work would be required to change its supply chain and systems.
According to a Crisil report, 35%-40% of e-retail industry sales, amounting to Rs 35,000-40,000 crore, could be impacted due to the tightened policy.
Cloudtail is a joint venture between Amazon and NR Narayana Murthy’s Catamaran Ventures, while Appario is a venture between the e-tailer and the Patni Group.
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