•  The new clarification issued by the government regarding FDI in e-commerce has created a furore among firms in the sector and their vendors alike.

Important Provisions:

• Recently, the Department of Industrial Policy & Promotion issued a clarification to the existing rules pertaining to Foreign Direct Investment in e-commerce companies. The main features of the clarification include the provision that vendors that have any stake owned by an e-commerce company cannot sell their products on that e-commerce company’s portal.
• Another provision says any vendor who purchases 25% or more of its inventory from an e-commerce group company will be considered to be controlled by that e-commerce company, and thereby barred from selling on its portal. This provision aims to ensure that vendors in which marketplaces, such as Amazon, have a stake do not sell the bulk of their items to a third-party vendor who then goes on to sell those items on the e-commerce marketplace.
• In other words, the provision seeks to deny control by the marketplace entity over vendors.
• The third major provision says the e-commerce firm will not be allowed to influence the price of a product sold on its portal by giving incentives to particular vendors.

Analysis:

• E-commerce companies can operate under two different models in India. The first is the marketplace model where the e-commerce firm simply acts as a platform that connects buyers and sellers. FDI is allowed in e-commerce companies in this model. The second model is inventory-based where the inventory of goods sold on the portal is owned or controlled by the e-commerce company. FDI is not allowed under this model.
• The thrust of the DIPP policy is directed at protecting small vendors on e-commerce websites. It seeks to ensure small players selling on the portals are not discriminated against in favour of vendors in which e-commerce companies have a stake. The Confederation of All India Traders welcomed this move as it feels the new set up will ensure a level playing field for all vendors looking to sell on the e-commerce portals. Smaller marketplaces that do not have stake in any vendors will also be able to now compete with the big daddies.
• The main players to be affected will be group companies and affiliates of the biggest e-commerce platforms, Amazon and Flipkart. These include CloudTail, WS Retail, Myntra and private label brands such as Amazon Basics and Flipkart’s MarQ and to some extent the private label business of online marketplace operator ShopClues.