DNA Edit: E-commerce blues – Online companies hate changing their perfect ecosystem

You cannot have the cake and eat it too. That is, apparently, what leading e-commerce companies in India want to do. There is no reason otherwise for Amazon and Walmart-owned Flipkart to ask the government to extend its February 1 deadline that seeks to announce major changes in the Foreign Direct Investment (FDI) policy for e-commerce companies. The firms say they were not consulted before the proposed changes and it will take time to overhaul their business models altogether. While Amazon has asked for time till June 1, Flipkart wants six months before they can get their act together. The latest provisions announced in the last week of December 2018 have shaken the e-commerce industry as it requires sweeping changes in its business model. 

The bone of contention revolves around two particular clauses: First, no vendor can have equity participation by the marketplace or its group companies. Second, the inventory of the vendor will be deemed to be controlled by the marketplace if more than 25 per cent of his purchases are from the marketplace entity, including its wholesale unit. The market place entity or its group companies cannot have control over inventory under FDI rules. There is little in the proposed changes for the e-commerce firms to find fault with. The two clauses are basically anti-monopolistic and it is this more than anything else which has got the companies’ goat. Amazon and Flipkart buy goods in bulk at cheap rates from manufacturers through their wholesale entities, Amazon Wholesale and Flipkart India Pvt Ltd, and then sell them to companies or preferred sellers, which in turn are firms in which the e-commerce company or a group entity may have an equity stake. 

Clearly, the new regulations will deal a body blow to this cozy arrangement, which has played no small role in pitchforking Indian online companies to the top. Equally, there is a whiff of a corporate battle of attrition in the air. The changes have been necessitated following long-standing complaints by brick-and-mortar traders and retailers who have alleged that overseas-owned online marketplaces were violating existing policy by influencing the prices of products, indulging in deep discounting and indirectly employing an inventory-based model. The second change in law, that proposes that the inventory of the vendor will be deemed to be controlled by the marketplace, will directly impact this ecosystem, leading to the outrage. 

The Confederation of All India Traders (CAIT), a domestic lobby, has opposed any move to delay implementation of the new norms. An influential body of traders, CAIT has asked the government to make it mandatory for e-commerce companies to obtain a compliance certificate by March 31, to be able to raise funds. Such is the anger between online and offline companies that CAIT has demanded no less than a “probe” into the business activities of big e-commerce companies over the last two-three years. What’s more, domestic traders have called for including penal provisions in the new e-commerce policy. Looks like a difficult road ahead.