Cap on sales by vendor of e-tailer to be measured in value terms

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New Delhi | Updated: May 27, 2016 8:04:57 AM

‘An e-commerce entity will not permit more than 25% of the sales effected through its marketplace from one vendor or their group companies’

The cap on sales by a single vendor or a group entity of an e-tailer at 25% — as stipulated in the latest guidelines on foreign direct investment (FDI) in B2C e-commerce — will be measured in terms of the value of sales, and not volume, according to sources.

Also, the annual sales by a vendor on an online marketplace will be taken into consideration when the government assesses compliance with such a cap, sources told FE. The annual balance sheet of an e-commerce player will be looked into while assessing compliance, one of the sources said.

While notifying the guidelines — which are mostly in the nature of clarifications — earlier this year, the department of industrial policy and promotion (DIPP) had said: “An e-commerce entity will not permit more than 25% of the sales effected through its marketplace from one vendor or their group companies.” The aim was to ensure that the marketplace model isn’t misused by e-tailers and the vendor base is remains broad-based.

While the guidelines sought to end uncertainties over the FDI policy framework governing players like Amazon, Flipkart and Snapdeal, analysts complained that it was still not clear if the sales by a vendor would be measured in value or volume terms. Also, the period of sales to assess compliance of such a rule (whether the vendor has to restrict its sales to 25% every quarter or it will have the flexibility to stick to the ceiling on annual sales basis) wasn’t mentioned in the guidelines either, they said.

Clarity on the guidelines was crucial as, some key players have been sourcing a substantial chunk of items from certain vendors. According to a recent India Ratings report, players such as Amazon and Flipkart generate major portions of their sales from joint-venture vendors, namely Cloudtail India and WS Retail Services, respectively. The cap on sales by a single vendor or group company can impact the revenues of the e-commerce firms and those with concentrated vendors will have to undergo significant restructuring of their business model, the report had said.

Analysts say if the cap is based on the value of sales, vendors supplying high-value items like jewellery, laptops or electronic items to an e-tailer will be at a disadvantageous position vis-a-vis those that sell items like garments or shoes etc. However, the sources said making sales volumes the basis of such a cap would make it extremely difficult to monitor the compliance of the rule.

The government in March defined the market place model of e-commerce as “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” and allowed 100% FDI through automatic route. However, marketplace e-tailers can’t have ownership of goods, as they are supposed to act only as facilitators between buyers and sellers and not influence the selling price of the goods. This is because FDI is still banned in the inventory model of B2C e-commerce. DIPP secretary Ramesh Abhishek had earlier said the cap on a vendor’s sales was a “reasonable move”.

The Indian e-commerce market has been growing rapidly, thanks to factors including factors government initiatives (such as Digital India, Make in India and Start-up India), increase in internet penetration and growth in the adoption of smartphones, according to a report by the Confederation of Indian Industry and consultancy firm Deloitte in April. The B2C e-commerce market in the country could grow to almost $102 billion by 2020 from just $16 billion in 2015, the report had said.

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