What Does the New FDI Policy For E-Commerce Actually Mean?
The government recently released new changes to the FDI policy governing the e-commerce sector. These guidelines which strike down at predatory pricing and deep discounts aim to provide a level-playing field for all can prove to be a game changer for the sector.
I. High Level: The Ministry of Commerce and Industry recently released new changes to the FDI policy for the e-commerce sector which aim to cut predatory pricing and deep discounting by retail giants, thereby bringing about a "level-playing field" for the smaller and multi-channel players, as well as the brick and mortar retailers.
II. Differentiation: The guidelines differentiate between a Marketplace based model of e-commerce and an Inventory based model of e-commerce, allowing 100% foreign direct investment through automatic route in the former, but no such capital injection in the latter.
Marketplace based model of e-commerce: In this model, the role of the e-commerce entity is restricted to being a facilitator between the buyers and the sellers with no ownership or control over the inventory or the good and services to be sold.
Inventory based model of e-commerce: Within this model, an e-commerce entity owns the inventory of goods and services and sells them directly to the customers.
III. Why?: Experts opine that it was the heavy discounts, primarily funded by FDI which made it difficult for smaller players and offline retailers to compete against the big players. The new guidelines would ensure fair play for all.
IV. Current Scenario: Till now big the retail giants such as Amazon and Flipkart were bypassing the Marketplace model by creating legal entities which first buy from vendors (i.e in a way keep inventory).
Concentration: As per the new regulations, an e-commerce marketplace entity will be deemed to control the inventory of a vendor if the marketplace entity or its group companies purchases more than 25% of such a vendor’s inventory.
Equity: 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.
No more Discounts: E-commerce marketplace entity are prohibited from directly or indirectly influence the sale price of goods or services.
No more exclusivity: The regulations dictate that platforms cannot enter into exclusive deals with sellers. This would mean that online exclusive brands would now have to tap multiple companies to sell their products.
VI. Cause & Effect:
For Brands: Brands like BPL, Sanyo, Thomson, Xiaomi, OnePlus, etc, operate as online-exclusive brands on online marketplaces such as Amazon India and Flipkart. In light of the new guidelines, these are likely to enter into partnerships with multiple platforms, become sellers by themselves or venture offline, focusing on retail expansion.
For retail giants: Flipkart and Amazon have launched their private labels such as Smartbuy (Flipkart’s native label for chargers and cables) and MarQ (Flipkart’s homegrown brand for air conditioners and smart televisions) and Amazon Basics (the giant’s native arm which sells electronics, kitchen and dining, travel and more.) which offer goods and services at lower costs and higher margins. Flipkart and Amazon may have to enter into re-seller agreements with multiple Indian companies to be able to sell their products as per the new FDI guidelines.
VII. Loopholes: The new FDI rules state that an online marketplace cannot sell products from a vendor in which they have a stake. However, they do not say anything about selling goods from a subsidiary firm of a vendor. For example, Cloudtail is a joint venture between Amazon.com and Narayan Murthy’s family office Catamaran Ventures, which forms a majority of Amazon's sales.
VIII. The Watchdog: The government is also considering the appointment of a dedicated e-commerce regulator.
If implemented with due diligence, the new rules can provide the much-needed fillip to small players and brick-and-mortar retailers who have suffered massive losses on back of the colossal discounts and cashbacks offered by the retail giants over the years.
IX. Next steps: The FDI rules are expected to come into force by February 1st, 2019. A new comprehensive draft policy for e-commerce sector as a whole is expected to be released in a few weeks.