New FDI policy on e-commerce: How marketplaces are to be affected

In shopping malls, it's common to find people outside the shops than inside them. Several of them select the clothes too, but eventually order it from online platforms offering attractive discounts.

It is to prevent this consumer behaviour and create a level playing field between offline and online retail that seems to be the underlying thought behind the circular on Foreign Direct Investment (FDI) in e-commerce.

"It is a strategic decision from the government to promote business and create livelihoods by keeping competition alive and protecting small retailers," says Pranav Jain, Partner at law firm MDP & Partners.

In line with this thought, the draft prohibits e-commerce entities providing marketplace to influence the sale price, directly or indirectly. It allows only the sellers to determine the discount. The circular extends its scope by saying marketplaces cannot sell the inventory it has a stake in, directly or indirectly, through any of its group companies on its own platform.

Read More: Is it necessary to ban e-commerce marketplaces from selling exclusive brands or promoting a particular vendor?

The impact of these clauses will have a significant impact on multi-brand, multi-product retailers like Flipkart and Amazon.

Over the years, for better inventory management and faster delivery, several of these platforms have invested in a joint venture or a subsidiary. For instance, Amazon has Cloudtail, which is essentially a wholeseller that stocks goods and when an order is placed, it delivers. They have a huge buying capacity and hence get better discounts from brands, which offline dealers cannot negotiate. As a result, several users flock to online channels to make purchases.

What has also happened is these marketplaces have started investing in their own brands. Amazon has launched in-house brands such as Amazon Basics, Mix. Myntra also owns several brands such as Roadster, Mast & Harbour, HRX, Here & Now etc through its another company  Myntra Fashion Brand. Private labels offer better margins, control over supply chain and distribution as against third-party brands.

As per the circular, the marketplace cannot have any "'equity participation" or "control" over the sellers, so, the inference is Amazon cannot sell products of Amazon Basics on its platform.

Jain says that since the circular is effective only in February 2019, these companies will negotiate with government. "They might go under approval route for their platform-owned sellers and propose a charter to work around this problem and may start offering more incentives to other sellers on its platform."

The circular also puts the responsibility on the marketplace to ensure no seller sells more than 25 per cent of its products on its platform. This will ensure each seller is listed on at least four or more  marketplaces and does not remain exclusive to one or two, says Vinayak Burman, Managing Partner of Vertices Partners.

Burman adds, "The underlying theme of the draft is limiting marketplace entities with foreign investments or who want to receive FDI to offer only services such as technology, logistics, warehousing and refraining them from entering into core retail, that is, buying and selling of goods."

Indian companies like Reliance Retail, Tata CliQ, Chroma that do not have any foreign investment are outside its scope.

"There has to be a balance maintained between investor's interest and Indian retailers," says Burman. Currently, the draft is heavily tilting towards Indian retailers. He suggests, it could be considered to provide a clause that limits the exposure of foreign investors to a significant minority so domestic shareholders are always in control of the entity.

"There is still a lot of subjectivity and loopholes in the draft and it is all inference-based as of now. This will start a negotiation process between the government and the companies to reach a middle ground," says Jain.

Also Read: FDI in e-commerce: Why new policy won't stop Amazon, Flipkart from offering discounts