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Exclusive: New FDI guidelines invite sweet-sour reactions from e-commerce firms in India

by Tanya Krishna

29-December-2018  |  6 mins read

FDI guidelines
Image Courtesy: india-briefing.com

The year 2018 ended with somewhat of a jolt for the e-commerce firms in India. The notification by the government on reviewing of the Foreign Direct Investment (FDI) policy in e-commerce has received mixed or more so, confused reactions from the overall industry.

Under the new norms, online firms in the likes of Flipkart and Amazon India have been barred from selling products of companies in which they have a stake. Also, the revised policy prohibits these e-commerce websites from entering into an agreement for exclusive selling rights of products. The decision will come into effect from February 1, 2019.

“An 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,” said the ministry in a statement offering clarity on FDI Policy on e-commerce.

A Mixed Bag of Reactions

Asked about Amazon India’s take on the notification by the Department of Industrial Policy and Promotion (DIPP), the company spokesperson said that “the firm is evaluating the circular” while Flipkart refrained from talking and issues a statement saying that the government policies will have a lasting impact on the e-commerce sector, which can create lakhs of jobs in India.

Besides the cap of 25% inventory on an e-commerce platform by a single vendor, the new policy also bars online firms from giving away cashbacks and deep discounts.

The directive came after online sellers complained to the Competition Commission of India that Flipkart and Amazon were indulging in predatory pricing and deep discounting, destroying the business of smaller vendors. The complains were even registered by offline retailers in the backdrop of dipping footfall in brick-and-mortar stores.

Meanwhile, industry analysts maintained that the e-commerce players need to re-look their operating strategies in India and that it was time for these firms to look at franchise channels, rather than equity investments channels to do business in India.

However, not all e-commerce firms frowned upon at the recent development. Sanjay Sethi, CEO & Co-Founder, ShopClues, told Apparel Resources, “The clarification on FDI policy for e-commerce vindicates our long-standing position on FDI in e-commerce. It is an acknowledgement that all the major foreign players have been consistently violating the spirit of the policy from day one. Almost all the clarification points mentioned in this policy can be directly attributed to an active violation by these foreign players. On one hand, we are happy that this clarification will finally close the backdoor that has been blatantly exploited by these players. On the other hand, it is sad that DIPP and MoCI allowed this to happen for so long. This has resulted in irreparable damage to our SME ecosystem and fair-competition. What remains to be seen now is how effective we will be in ensuring compliance of this policy.”

Another online firm Snapdeal, which lost its magic amid a discount war between the two e-commerce giants, also welcomed the policy review.

Snapdeal Co-Founder Kunal Bahl, tweeted, “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.”

Meanwhile, the Clothing Manufacturers Association of India (CMA) also thanked the government for implementing “the much awaited policy which will bring level players for all domestic retailers”. Rahul Mehta, President, CMAI, in a press release, stated, “With these clarifications, marketplaces will only act as facilitators of the transaction and not be responsible for the actual product. All product sales facilitated by marketplaces will be a contract between the customer and the actual seller. This new clarification will bring much needed level playing field for sellers on marketplaces. With complete restriction on marketplaces to participate directly in retailing, the policy will give Indian companies the opportunity to build a stronger retail model and avoid channel conflicts.” He also requested the government to appoint monitoring agencies to ensure compliance to norms and initiate action against marketplaces that flout the policy.

The move by the government will also significantly impact it’s image overseas. India had recently eased rules to bring in more FDI, but post the policy review, investors would be wary. While it is too early for the overall industry to react and strategise its next move, the following days will definitely be crucial and will under scanner.