E-commerce companies such as Amazon, Myntra, Flipkart were on cloud nine for a few months before the government’s strict FDI norms burst their bubble of joy. The government, in December 2018, put forward new norms for online players. These barred e-tailers from selling products of companies in which they have a stake. Furthermore, they were also barred from entering into an agreement for exclusive sale of products, wherein the vendor cannot obtain over 25 per cent products from group companies of the same marketplace where the e-tailers wished to sell these products.
Relief for private labels
Even though the government has decided to go ahead the deadline it put forth, Amazon and Flipkart may be able to dodge these norms as the government allows them to own private labels. This enables them to garner higher margins. Focusing on private labels could allow Flipkart and Amazon to compensate for the loss incurred due to losing control over inventory sold on their platforms. Experts say, although the government’s notification disallows sellers in which a marketplace had equity participation from selling on the platform, a late clarification allows these firms to own private label. This could be used as a loophole.
Atul Pandey, Partner, Khaitan & Co, believes this concession leaves it open to interpretation if the manufacturer in which the e-tailers have shares is allowed or disallowed to sell on their platforms directly. Suneeth Katarki, Founding Partner, IndusLaw notes the norm at present states the manufacturer cannot sell on the platform. The law does not clarify if this is applicable to only trading entities or manufacturers also. If e-tailers are barred from holding stake, it would violate FDI norms for manufacturing sector which would also be in conflict with the government’s desire to encourage manufacturing in India.
Norms to affect e-com sales
Besides affecting sales on Amazon and Flipkart, the new norms will also affect Appario Retail and Cloudtail, the entities that sell on Amazon and have a stake as well. Sales on Flipkart and Amazon are expected to drop by around 50-60 per cent and unless these two players halt sales from Cloudtail and Appario Retail, they would be flouting the new norms.
Also, the new norms restrict numerous sellers who source from wholesalers of these two e-tailers directly, to go off their respective websites. According to the new rules, entities like Cloudtail and Appario Retail, which sell on Amazon and have equity participation from the US e-commerce major, will not be allowed to sell on the platform. Further, the new guidelines also prohibit multitude of sellers who source directly from wholesale arms of Amazon and Flipkart to go off the platforms.
These guidelines are bound to negatively impact the country’s e-commerce industry largely due to the bulk of gross sales that these two companies drove. However, it’s too early to deduce the extent to which they will impact the industry. Also, new guidelines have affected sentiments of international firms. The industry will take some time to infer the overall impact of these laws. Till then, companies need to wait and watch.