India Announces Changes to FDI Policy for E-Commerce

India Announces Changes to FDI Policy for E-Commerce

India’s Ministry of Commerce and Industry released new changes to the FDI policy for the e-commerce sector which aim to cut predatory pricing and deep discounting by large e-commerce retailers to ensure a “level-playing field” for smaller and multi-channel players, as well as the brick and mortar retailers.

The guidelines differentiate between a Marketplace-based model of e-commerce and an Inventory-based model of e-commerce: 100% foreign direct investment through an automatic route will be allowed in the former, but not in the latter.

  • A Marketplace e-commerce entity is restricted to being a facilitator between the buyers and the sellers with no ownership or control over the inventory or the good and services to be sold.
  • An Inventory e-commerce entity owns the inventory of goods and services and sells them directly to the customers.

Per the new regulations, an e-commerce marketplace entity will be deemed to control the inventory of a vendor if the marketplace entity or its group companies purchase more than 25% of such a vendor’s inventory; further, they are prohibited from directly or indirectly influencing the sale price of goods or services.

“An entity that has equity participation by an 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,” the commerce ministry said.

The regulations stipulate that platforms cannot enter into exclusive deals with sellers. This means that online exclusive brands will now have to tap multiple companies to sell their products, become sellers themselves, or venture offline.

Flipkart has launched its private labels Smartbuy and MarQ, while Amazon has its Amazon Basics. These brands offer goods and services at lower costs and higher margins. Flipkart and Amazon may have to enter into re-seller agreements with multiple Indian companies to be able to sell their products per the new FDI guidelines.

Flipkart requested New Delhi to put in place a broad, market-driven framework for the e-commerce industry after consultations with relevant stakeholders. It added that the e-commerce ecosystem has created thousands of jobs apart from fostering innovations in MSME manufacturing, supply chain, warehousing, packaging, and digital payments. “Government policy changes will have long-term implications for the evolution of the promising sector and the whole ecosystem. It is important that a broad, market-driven framework through the right consultative process be put in place in order to drive the industry forward,” noted Flipkart.

The government is considering appointing a dedicated e-commerce regulator. The new rules will be applicable from February 1, 2019. A new comprehensive draft policy for e-commerce sector as a whole will be released in a few weeks.



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