One of the most regulated and booming sectors in India due to the high penetration of the internet in the market, the online retail sector has witnessed a huge growth in the previously niche market, attracting other retail giants such as Amazon, Walmart, and Alibaba. The forthcoming of such retail giants has caused massive increase in foreign investments in such a market, with a steadily expanding demand of products. The introduction of the new E-commerce policy is bound to bring about a change in the trade activities of key players, due to a massive makeover of the previously followed regulations.

Changes in Regulation

The Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce, Government of India, on December 26, 2018, introduced certain changes termed as clarifications to the 2017 policy governing foreign direct investment (FDI) in the e-commerce sector. Such changes were made as they had the potential to change the dynamics of the Indian e-commerce space, which is currently controlled by American retail giants such as Amazon and Walmart. The policy saw one of the best clarifications from the government because there were rules which talked about marketplace B2B business, and doing retail business in circumvention of that policy – an ambiguity, which in some way was being taken advantage of. This brought an end to people doing retail business, which had been the intent of the policy for a long period of time. The policy is also aimed at the improving the overall internet business space, including digital payment platforms like Amazon Pay and Paytm.

Key Changes Introduced

  • An entity providing an e-commerce marketplace (‘Marketplace Entity’ or ‘ME’) shall not exercise ownership or control over the inventory which it intends to sell.
  • Any ownership or control over inventory shall convert it into an inventory based model, which cannot receive FDI.
  • A ‘Marketplace Entity’ will be deemed to control the inventory of a vendor if more than 25% of the purchases of such a vendor are from the Marketplace Entity, or its group companies.
  • A vendor shall not be permitted to sell on the marketplace owned by the Marketplace Entity if such an entity or its group companies own any stake in the vendor, or exercises control over the inventory of such vendor.
  • Marketplace Entity will not influence directly or indirectly the sale price of goods or services sold over the marketplace by the vendors and shall maintain level playing field for all vendors.
  • Any services provided by the M.E. or any other entity in which Marketplace Entity has an equity stake to the vendors on the marketplace shall be provided on arm’s length basis and in a fair and non-discriminatory manner.
  • Such services will include fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing etc.
  • Cash back provided by group companies of Marketplace Entity to buyers shall be fair and non-discriminatory.
  • A Marketplace Entity will not mandate any seller to sell any product exclusively on its own platform.
  • An e-commerce marketplace entity will be required to furnish a certificate along with a report of a statutory auditor to the Reserve Bank of India, confirming compliance of above guidelines, by 30th of September of every year for the preceding financial year.

Impact of the Changes

The above-listed changes are likely to impact the core business model of the likes of Amazon and Flipkart, where they encourage sourcing and sales through their preferred vendors like Cloudtail and WS Retail amongst others, where they have a direct or indirect equity stake.

The customers buying products sold by these vendors are usually given additional benefits in terms of pricing, fast delivery and cashbacks etc. By virtue of overall control, they provide large discounts, better user experience, and quality control.

Furthermore, Amazon or Flipkart, owing to their dominant positions, now cannot insist on exclusive tie-ups with brand owners. Also, the private labels launched by Amazon and Flipkart now need to cede space to other players in the same category, and cannot be indiscriminately promoted at the expense of others. The changes benefit brick and mortar, small and medium retail players, who, for last decade have had to face an onslaught of indiscriminate discounting by the online players. Their lobbying has finally yielded the desired results. Indian retail giants like Future Retail will also benefit as they will be able to match the discounts offered by online retail while providing instant delivery.

Sources: cnbc.com, livemint.com, indianexpress.com

Image Sources: fibre2fashion.com , CNBC.com

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