While the government’s tighter FDI rules for selling products online may help domestic retailers at the cost of Walmart and Amazon’s India e-commerce ambitions, eventually, customers may be in for some benefit and some loss. The government announced new rules late in December 2018, acting upon complaints from domestic retailers that e-tailers such as Flipkart and Amazon were eating up their market.
While the Confederation of All India Traders (CAIT) welcomed the move, industry bodies US India Chambers of Commerce (USAIC) and US India Strategic and Partnership Forum (USISPF) said that it will adversely affect FDI in India. The move might be a big headache to foreign companies in India as this would necessitate a restructuring of operations by Amazon India and Flipkart, experts said.
The new rules may mean a setback to Walmart, which just put in $16 billion into acquiring Flipkart, ostensibly to leverage Flipkart’s huge online presence to sell its products, L. Badri Narayanan, Partner, Lakshmikumaran & Sridharan Attorneys, said to FE Online. This would leave the Flipkart acquisition as only a strategic investment for Walmart to counter the dominance of Amazon and others in this space, Narayanan added.
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Further, “the investors will either have to restructure themselves or will not be able to use the platform of such e-commerce entity for their inventory,” Daizy Chawla, Senior Partner, Singh & Associates, told FE Online, without specifically referring to Walmart’s acquisition of Flipkart. Big companies made huge investments in Indian e-commerce in the absence of clarity about the definition of ‘control’ over the vendor, Daizy Chawla said, adding that now the clarification have put these companies in a fix.
However, since Walmart’s cash and carry business is not affected by this change, the company is still free to wholesale, and its products will continue to come into the Indian market through this route, Badri Narayanan said.
The new rules effectively seek to make products available to a wider customer base on equal terms, rather than on a particular platform on preferential basis. Under the new rules, Amazon’s and Flipkart’s own vendors Cloudtail and Retailnet will not be allowed to sell their products on their respective marketplace at all, the Kotak note said.
This would mean that such sellers will have to make their products available on other platforms too, on an arm’s length basis, eventually offering more choice to consumers. E-commerce giants use own platforms to push their in-house products such as Amazon Echo and Solimo, often over other brands, with better placement, exclusive deals, and push notifications. Now, no product can be Amazon or Flipkart exclusive.
Customers: Win some, lose some
The impact of this policy may not be as much on the ultimate customers as long as the retail platform continues to ensure the quality and choice of products from independent suppliers that they will now need to source more from, Reeba Chacko, Partner & Head, Corporate, Cyril Amarchand Mangaldas, said to FE Online.
Given that this space is still growing and even traditional retailers are entering the online space, the ultimate consumer could even benefit, she said.
Also, cashback services, which were once exclusive to certain vendors will now have to be rendered to all the vendors in a non- discriminatory way, according to the new rules.
However, Daizy Chawla of Singh & Associates disagrees. “The major loss for the customers will be the non availability discounts/cash back/exclusivity the e-retailers were offering with regard to particular vendor’s’ product as the press note provides for ‘fair and non-discriminatory’ selling,” she said.
What this means for FDI in India
USAIC and USISPF have flagged the new policy saying that it is quite restrictive. However, Daizy Chawla of Singh & Associates said she doesn’t think the new rules will curb the influence of foreign retailers/ corporations in the Indian market. “The press note no-where restricts the entry of foreign retailers/corporations and have only defined the extent of the involvement/ participation of e-commerce entity in any B2B e commerce activities performed by the Vendor registered with such e commerce platform,” she said.
L. Badri Narayanan of Lakshmikumaran & Sridharan Attorneys concurs: “In my view, even after such a policy change, the marketplace is still a viable model for foreign investment,” he said.
By Prachi Gupta