Context:

The government announced new e-commerce rules:

Restricting players from selling the products of companies in which they have a stake.

Capping the percentage of inventory that a vendor can sell through a marketplace entity (IT platform of an e-commerce entity) or its group companies.
To curb the practice of deep discounts, the government said they cannot directly or indirectly influence the price of goods and services, and also brought in a new set of rules that bar the sale of products exclusively in one marketplace.

What are the new rules, and what do they means for companies, vendors and customers?

From February 1, 2019, e-commerce companies running marketplace platforms such as Amazon and Flipkart cannot sell products through companies, and of companies, in which they hold equity stake.

While foreign direct investment is not permitted in the inventory-based model of e-commerce, the clarification put a cap of 25% on the inventory that a marketplace entity or its group companies can buy from a vendor.

Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.

What is the difference between marketplace model and inventory model in ecommerce?

The new FDI policy regulation in the ecommerce sector has allowed 100% FDI in marketplace model of e-commerce under automatic route. Correspondingly, no FDI is allowed in the inventory model.

Marketplace model:

According to the FDI policy guideline, “Marketplace model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.”
Marketplaces are platforms that enable a large, fragmented base of buyers and sellers to discover price and transact with one another in an environment that is efficient, transparent and trusted.

The main feature of the market place model is that:

the e-commerce firm like flipkart, snapdeal, amazon etc. will be providing a platform for customers to interact with a selected number of sellers.

When an individual is purchasing a product from flipkart, he/she will be actually buying it from a registered seller in flipkart.

The product is not directly sold by flipkart. Here, flipkart is just a website platform where a consumer meets a seller.
Inventory, stock management, logistics etc are not supposed to be actively done by the ecommerce firm.

Inventory model:

According to the FDI policy, “Inventory model of ecommerce means an ecommerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.”

The main feature of inventory model is that:

the customer buys the product from the ecommerce firm.
He/she manages an inventory (stock of products), interfaces with customers, runs logistics and involves in every aspects of the business.
Alibaba of China is following the inventory model.

How are consumers and small retailers likely to be impacted?

Consumers may no longer enjoy the deep discounts offered by retailers that have a close association with marketplace entities.

The absence of large retailers will, however, bring relief to small retailers selling on these platforms.

Traders running traditional brick-and-mortar stores, who now find it difficult to compete with the large e-commerce retailers with deep pockets, could gain. Small vendors should get enough chances to participate in the online business.

Many small and medium enterprises have been of late selling through e-commerce portals fatalistically in the realization that if you cannot beat them, join them.

But they lose out to competitors supported by the e-commerce portal both by way of equity stakes and otherwise.

Conclusion:

The government has said that e-commerce entities will have to maintain a level playing field, and ensure that they do not directly or indirectly influence the sale price of goods and services.

The policy mandates that no seller can sell its products exclusively on any marketplace platform, and that all vendors on the e-commerce platform should be provided services in a “fair and non-discriminatory manner”.

Services include fulfilment, logistics, warehousing, advertisement, payments, and financing among others.

Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs (Micro, Small & Medium Enterprises). These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce.

Way Forward:

In order to keep a track of such compliance, a new compliance has now been introduced wherein an e-commerce portal is now required to furnish a certificate along with a report of statutory auditor to the Reserve Bank of India (RBI), confirming compliance of above guidelines, by 30 September of every year for the preceding financial year.

This will ensure that the RBI is completely aware of the extent of compliance by the major e-commerce players swearing by the marketplace model.

The e-commerce reforms comes hot on the heels of better and improved consumer protection ushered through a fresh Consumer Protection Bill 2018 passed by the Lok Sabha that also seeks to discipline online sales.

The presented e-commerce reforms is to provide a level-playing field for bricks and mortar stores by and large owned by the desis.