But, with riders; restrictions on discounts may change the structure of the sector
March 31, 2016: The Indian government led by Narendra Modi has allowed 100% FDI in online retail consumer business, which operates as a marketplace. Marketplaces are basically companies that act as a facilitator between buyers and sellers. However, FDI is not allowed in inventory-based models, where the company owns the goods that are being sold through its platform. In India, most large ecommerce players operate as marketplaces.
To bring clarity, the Department of Industrial Policy and Promotion (DIPP ) has also come out with the definition of e-commerce, inventory-based model and marketplace model.
Marketplace model of e-commerce means providing of an IT platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.
The inventory-based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to consumers directly, according to the guidelines.
A marketplace entity will be permitted to enter into transactions with sellers registered on its platform on business-to-business basis, DIPP said. However, an ecommerce firm will not be permitted to sell more than 25 per cent of the sales affected through its marketplace from one vendor or their group companies.
This could leave both Flipkart and Amazon in a fix. For instance, Cloudtail India brings in at least 40% of sales on Amazon India. Cloudtail India is a joint venture between Amazon.com and Infosys co-founder NR Narayana Murthy’s investment business, Catamaran Ventures.
Similarly, for Flipkart, WS Retail is the largest seller. The share of WS Retail is however not known.
Nasscom, an association which represents India’s IT sector, welcomed DIPP’s guidelines to introduce 100% FDI in e-commerce. “This is a clear indication that the government identifies marketplaces as an electronic intermediary, operating a technology platform to facilitate sales and transactions between independent third-party sellers and buyers.”
However, according to Nasscom, the 25% of the sales in the marketplace may prove to be restrictive, more so if the vendor sells high value items.
Both Flipkart and Amazon refused to comment on this development. But Snapdeal, which is another large player in the Indian market welcomed the move. Kunal Bahl, co-founder and CEO, Snapdeal, said, “It is a great feeling when you stick to the course that you believe in, pays off: Focusing on a pure marketplace and not doing inventory.” Unlike Flipkart and Amazon, Snapdeal does not have one single large player.
Another clause says that e-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain level playing field. In other words, this clause will restrict the freedom of the e-commerce companies to offer discounts to buyers. This can be a roadblock to ecommerce companies since they thrive on discounts. The news however brings cheers to offline retail players who have long complained about the unfair discounts given to consumers online.