E-commerce, Government, FDI : Amazon, Flipkart

In Dec 2018, the Government came out with stricter guidelines that govern foreign direct investment (FDI) in e-commerce firms. This came to effect from 1 February 2019. Customers said that even the delivery timing and availability of the products suffered post the implementation of the new FDI rules. What are these new FDI rules? Why was the change made? How does it impact ECommerce companies like Flipkart, Amazon? How are the ecommerce companies responding to the FDI changed Norms?

According to a survey conducted by Local Circles, a community media platform that hosts over startups and SMEs, 25 per cent of the respondents said that price of the products including shipping costs was higher by over 25 per cent during the period.

What are the changes for e-commerce announced by the Government?

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

While foreign direct investment(FDI) 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,” the statement said.

Companies will have to file a certificate along with a report of a statutory auditor to the Reserve Bank of India confirming compliance of guidelines by September 30 every year for the preceding fiscal.

The image below shows the new rules for Online Sellers and how it impacts. Image Ref: Economic Times

Ecommerce Amazon, Flipkart FDI Government
Ecommerce Amazon, Flipkart FDI Government

Why did the Government come out with new FDI regulations?

According to the government, this was in response to several complaints it received on how marketplace platforms were violating the policy by influencing the price of products and indirectly engaging in an inventory-based model. Brick-and-mortar retailers have alleged that such marketplaces are violating rules and actually holding their own stock and selling cheap.

Another reason suspected is Reliance Entry into the E-commerce Forum.

Another reason suspected is Elections, to get vote of the small offline sellers.

According to statistics, online transactions were 0.8% of India’s total retail market in 2014, and are expected to touch 4.4% this year and expand quickly in the coming years. E-commerce revenue in India is projected to grow to $150 billion in 2022, a report by Nasscom and PwC had said in August last year.

E-commerce companies, such as Amazon and Flipkart, have been luring customers with deep discounts and exclusive offerings. The bar on such firms ‘influencing’ pricing and mandating vendors to sell exclusively on their platforms has an impact on customer behaviour. Most customers shop online for deep discounts and exclusive offerings, which may not be available on other online platforms, or in offline stores.

Over the last few years, companies such as Flipkart, Myntra and Amazon India, among others, have been introducing private label/in-house brands to garner more customers through exclusive offerings at lower costs and higher margins.

India’s e-commerce landscape is going through a churn. The government does not allow FDI in inventory-based e-commerce to consumers. However, it allows FDI in marketplaces where independent sellers can list and sell goods.

Who are the big marketplace retailers who were impacted?

Cloudtail India Pvt Ltd is the biggest retailer operating on Amazon, while WS Retail was the biggest seller on Flipkart. Under the new rules, Cloudtail and Appario, in which Amazon holds equity stake, may not be able to sell products on Amazon’s e-commerce platform.

Cloudtail’s ownership shows a clear link with Amazon. Incorporated in October 2011 as Sparrowhawk Sales and Marketing, its name was changed to Cloudtail India in August 2012. Prione Business Services holds 99.99% stake in Cloudtail. Prione is a joint venture between Amazon Inc. and Infosys co-founder N R Narayana Murthy’s Catamaran Advisors. Catamaran holds 51% stake in Prione, Amazon Asia Pacific Resources owns 48%, and the remaining 1% is owned by Amazon Eurasia Holdings.

Appario Retail is a wholly owned subsidiary of Frontizo Business Services, a joint venture between Amazon India Ltd and Ashok Patni, the co-founder of Patni Computer Systems. Frontizo’s filings with the Registrar of Companies show that Amazon Asia Pacific Holdings owns a 48% stake in the company, and Zodiac Wealth Advisors holds 51%. The remaining 1% is with Zaffre LLC, based in Delaware, United States.

How did E-commerce companies respond to new FDI norms?

According to a 2013 notification of the Reserve Bank of India with regard to FDI in India, a group company means two or more enterprises, which, directly or indirectly, are in a position to exercise 26% or more voting rights in the other enterprise or can appoint more than 50% of the members of the board of directors in the other enterprise.

Amazon rejigged its stake in Cloudtail and will soon do it in Appario Retail. In both Cloudtail and Appario, Amazon’s group companies will now hold 24% stakes and will not have any directors on their boards, making them compliant with the laws.

NR Narayana Murthy’s Catamaran Ventures increased its stake in Cloudtail’s parent company Prione Business Services to 76% from 51% earlier, reducing JV partner Amazon Asia’s stake to 24% from 49%. With this change, Cloudtail ceases to be an Amazon group company and becomes eligible to sell on the marketplace. Cloudtail also has independent plans. It will list on online marketplaces Snapdeal, Indiamart and other sites, and will also have its own website. However, it will not list on Flipkart.

What is the current FDI policy in e-commerce?

FDI policy on e-commerce, first pronounced through Press Note 2 of 2000, permitted 100% FDI in B2B e-commerce activities. With a view to clarifying the already existing policy framework, Press Note 3 was issued by DIPP in 2016.

As per Current policy, 100 per cent FDI is permitted in marketplace e-commerce activities. It is prohibited in inventory-based activities.

According to a 2013 notification of the Reserve Bank of India with regard to FDI in India, a group company means two or more enterprises, which, directly or indirectly, are in a position to exercise 26% or more voting rights in the other enterprise or can appoint more than 50% of the members of the board of directors in the other enterprise.

What is the marketplace model of ECommerce?

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 buyers and sellers to discover price and transact with one another in an environment that is efficient, transparent and trusted.

In a market place model e-commerce firm like Amazon, Flipkart, Paytm Mall, etc. provide a platform for customers to interact with sellers. When an individual purchases a product from Flipkart/Amazon, he is actually buying from a registered seller on Flipkart/Amazon. The product is not directly sold by Flipkart/Amazon. Here, Flipkart/Amazon is just a website platform where a consumer meets a seller. Inventory, stock management, logistics etc are not done by the ecommerce firm.

What is the inventory model of Ecommerce?

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

In the inventory, model customer buys the product from the e-commerce firm. The Firm manages an inventory or stock of products, interfaces with customers, runs logistics and is involved in every aspect of the business.

Alibaba of China follows the inventory model.

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