Bans exclusive marketing arrangements that could influence product prices.
The government on Wednesday tightened the norms for e-commerce firms having foreign investment, barring online marketplaces like Flipkart and Amazon from selling products of companies in which they hold stakes or control the inventory. The Centre also banned exclusive marketing arrangements that could influence product prices. The changed foreign direct investment (FDI) rules seek to correct the perception of inaction against e-retailers which are allegedly influencing pricing of products by offering huge discounts in violation of the FDI policy.
Retaining the restriction on FDI in the inventory model of e-commerce (except for food retailing), the department of industrial policy and promotion (DIPP) said the inventory of a vendor will be “deemed to be controlled by e-commerce marketplace if more than 25% of purchases of such vendor are from the marketplace entity or its group companies”. The earlier FDI rule had barred sales beyond 25% by a single vendor on an e-commerce platform. E-retailers declined to comment, saying they are still studying the notification. It’s not immediately clear as to how the policies will impact Cloudtail and WS Retail, which have been the dominant vendors on Amazon and Flipkart, respectively, in recent years. (WS Retail reportedly stopped selling its products on Flipkart recently).
To show its seriousness in enforcing the rules, the government now mandates that an e-commerce player has to furnish a certificate, along with a report of statutory auditor, to the Reserve Bank of India (RBI), confirming compliance of guidelines by the end of September of every year for the preceding financial year. While the earlier FDI policy, too, clearly barred discounts by e-retailers, the perception has been that the designated agencies — RBI and Enforcement Directorate — have been lax in enforcing it.
On their part, e-retailers like Amazon or Flipkart have maintained that they always comply with the FDI rules. The new rules will be applicable from February 1, 2019. The revised FDI rules say: “An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.”
It also said services should be provided by e-commerce marketplace entity or other entities in which it has direct or indirect equity participation or common control to vendors on the platform at arm’s length and in a non-discriminatory manner. Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. “For the purposes of this clause, provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory,” it added.
Anil Talreja, partner at Deloitte India, said: “The conditions have a mixed bag of clarifications and additional restrictions for stakeholders. This will certainly will push the impacted entities to relook at their business model, shareholding structure and transactions.” Atul Pandey, partner at Khaitan & Co, said the move is clearly targeted on plugging the loopholes in the earlier policy. As per the current policy, up to 100% FDI is permitted in only marketplace model of e-commerce.