Centre tightens norms for e-tailers, curbs deep discounts

Deep discounts and exclusive deals on e-marketplaces like Amazon and Walmart-owned Flipkart will soon become history.

E-tailers got a major shock on Wednesday evening after the government came up with a review of the policy on foreign direct investment (FDI) in e-commerce sector. While clearly defining e-marketplaces, the Ministry of Commerce and Industry barred such platforms from selling products offered by companies in which they own a stake. Additionally, e-commerce companies will not be allowed to enter into an agreement for exclusive sale of products any more.

The government said in a statement that inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies. Also, entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.

Addressing the discounting and freebies issue, the ministry said in the statement, cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purposes of this clause, provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.

The clauses prescribed by the government will be effective February 1, 2019, majorly impacting e-commerce industry leaders viz Amazon and Flipkart. In fact, industry sources said that vendor entities like Retailnet India, Cloudtail, Appario Retail owned and operated by Flipkart and Amazon control between 80% and 90% of the business on the respective platforms.

While Flipkart did not comment on the government's new provisions, an Amazon India spokesperson said, "We are evaluating the circular."

The government's move isn't surprising and was expected considering a lot of complaints were lodged by seller associations and many lobbies were pursuing it very aggressively.

Speaking to DNA Money, Sanchit Vir Gogia, chief analyst, founder and chief executive officer, Greyhound Research, said, "Measures were expected but not of such aggressive nature. Prima facie, this will be a dampener for a lot of e-commerce companies who will not be able to bypass the new rules anymore," he said.

Globally, it is common practice for e-commerce companies to operate with their own brands and trading companies and this business strategy is not exclusive to India alone. However, what Amazon and Flipkart were doing in India was became a major threat to offline retailers and that necessitated the government intervention.

"Predatory pricing was very aggressive from the e-commerce companies and in many ways they overdid the entire strategy. What they did wrong was kill the competition in totality," said Gogia adding that the new rules are expected to set a level playing field for pure marketplace operators allowing small traders to start trusting and using these platforms more aggressively.

Echoing the sentiments, Kunal Bahl, co-founder and chief executive officer, Snapdeal, said in his tweet, "Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce."

Calling the new provisions a mixed bag of clarifications and additional restrictions for stakeholders, Anil Talreja, partner, Deloitte India, said, "This will certainly push the impacted entities to relook at their business model, shareholding structure and transactions."

Industry experts are of the view that new steps and measures taken by the government may create issues akin to Zomato, which is under fire for charging 33% as commission from restaurant partners. Similarly, Amazon and Flipkart could start getting aggressive on charging the sellers on their respective platforms.

"Charges and commissions for using the platform could increase considerably. Secondly, they will take a very aggressive stance on the advertising strategy. Accordingly, their attempt to collect data will also increase as they will have to monetise it. How else will they get revenue?," said Gogia.

The new provisions are expected to reduce the delta between online and offline pricing. This basically means online will not be able to offer anything beyond convenience. "No trader will shave off so much of their profits. So this could mean more parity in pricing between online and offline. While that's a good thing, it's not really so considering how much money has already gone into Flipkart and Amazon," said Gogia.

Experts believe that impacted e-commerce companies will get busy restructuring their business model, shareholding and transactions. In fact, the e-marketplace operators are expected to get creative on the entities being floated by the promoters to sell on the platform. "This will definitely throw a spanner in the works for these companies. They could bring in a friendly third-party for the vendor entities and continue to be in business and provide aggressive pricing for the marketplace. The e-commerce companies will have to do some amount of attunement to be able to do business in the new reality, rules and regulations prescribed by the government. Businesses will now have to plan their model around the new reality," said Gogia.