The government on Dec 26, 2018 issued new guidelines for online companies having foreign investments, thereby stopping them from selling products of companies in which they hold shares. While these rules have been in place for four years, it is only now that the government has woken up to enforce it.
Primarily ecommerce business has two types of models – the vendor model and the marketplace model. Both Amazon India and Flipkart are marketplace models, where a company directly supplies a product to the consumer and takes a service charge for offering the platform to the sellers for selling their product through them. However, they also operate with a vendor model, where a product is picked up by an entity like Cloudtail and delivery to the customer is fulfilled by it.
What is the trouble in e-commerce –
As per the announcements of these strict norms Cloudtail and Appario (both being the major market holders) will not be able to sell products on amazon, as amazon itself has its share with these ventures.
- Cloudtail, owned 100% by Prione Business Services, is a 49 – 51 joint venture between Amazon and Narayan Murthy’s Catamaran India and Appario is a joint venture between Amazon and the Patni Group. Cloudtail is found to fulfill more than 25 percent of all Amazon India orders, and stat show it makes up around 42.19 percent of the group’s revenue. Now according to the government regulations, ecommerce companies having foreign direct investment cannot source more that 25 percent of their sales from a single company. This is really a success for small domestic sellers who were losing out their business on marketplaces to these big brands. Also, the new sellers who want to start selling on marketplaces this is really the perfect time to start as most of the products were sold by these brands but now if you select the right product you can definitely hold a good position and grab those sales.
- These wholesale companies purchase branded goods in bulk at a cheaper price from the manufacturers and then sell them on Amazon and Flipkart by offering discounts and cashback. These are those companies in which marketplaces have their shares and hence they capture most of the sales. The domestic players should feel cheerful as the government has now reacted to their complaints which will now result into a fair market competition so now both online and offline traders will be able to sell their goods in a transparent manner.
- Some exclusive deals between any brand and marketplaces will now be banned. Now a particular brand will not be able to provide a heavy discount on a particular marketplace.
How will new rules change this model –
- The select sellers such as Cloudtail that have equity participation are barred from selling unless Amazon ends its equity partnership with these groups. Also, Amazon’s Global Store, which is an Amazon entity, may not be able to have a presence on Amazon India’s marketplace such as Amazon Basic products.
- There is a 25% cap by value on any seller buying products from Amazon’s or Flipkart’s owned wholesale companies. Sourcing 75% of products from other sources will likely increase the cost.
- The platforms won’t be able to provide cashbacks to the buyers as the rule asks for a “fair” and “non- discriminatory” selling practices. The other cashbacks will only be offered by banks.
- Online exclusive deals between any brand and marketplaces will be banned. For example, Flipkart – Xiaomi kind of deals, where Xiaomi smartphones were sold at heavy discounts only on a particular marketplace will not be possible.
- The services like Amazon Fulfilled and Flipkart Assured that offer superfast delivery to certain consumers may also be deemed discriminatory.
Check this video after implementation of FDI norms on amazon on Feb, 1st 2019
Large sellers form multiple entities, which sell their products separately on online marketplaces. The latest update by the DIPP (Department of Industrial Policy & Promotion) is aimed at plugging those loopholes. However, some experts believe that lawyers will find a way to work around the updated guidelines as well, which come in effect from February. Amazon has not yet responded to these queries.