FDI in e-commerce

Context: The Department of Industrial Policy & Promotion recently issued a clarification to the existing rules pertaining to Foreign Direct Investment in e-commerce companies.

The main features of the clarification include:

• Vendors that have any stake owned by an e-commerce company cannot sell their products on that e-commerce company’s portal.
• Any vendor who purchases 25% or more of its inventory from an e-commerce group companywill 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.
• E-commerce firm will not be allowed to influence the price of a product sold on its portal by giving incentives to particular vendors.

Background:

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.

What is the context for these changes?

• What has been happening is that large e-commerce companies such as Amazon and Flipkart, while not owning inventory themselves, have been providing a platform for their group companies such as CloudTail and WS Retail respectively.
• Some see this as skewing the playing field, especially if these vendors enjoyed special incentives from the e-commerce firm, over others. These controlled or owned vendors may then be able to offer discounts to customers that competitors may not be able to match.

Significance:

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 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 small traders were complaining that deep discounts offered by the likes of Amazon and Flipkart are driving them out of business. The new norms aim to tackle the anti-competitive behaviour by e-commerce entities and to ensure that there is no wrong subsidization and the marketplace remains neutral to all vendors.

Who else will be affected?

• The main players to be affected will be group companies and affiliates of the biggest e-commerce platforms, Amazon and Flipkart.
• The provision that bars companies — in which e-commerce firms have a stake — from selling on their portals will hurt start-ups as well, since many of these will be barred from selling due to minor equity stakes being held by the e-commerce companies.
• Small vendors will not be as affected because most of them do not purchase more than 25% of their inventory from a single source and so they will be allowed to sell their items on the e-commerce platforms.

Sources: the hindu.