Govt Cracks Down on E-Commerce
Websites, No More Discounts Beyond 25%
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Market
Place Model under Attack
The government allowed 100% foreign direct investment
(FDI) in online retail of goods and services under the so-called “marketplace
model” through the automatic route.
It also notified new rules which could potentially end the
discount wars, much to the disappointment of consumers. This is because the
rules now prohibit marketplaces from offering discounts and capping total sales
originating from a group company or one vendor at 25%.
Indian e-commerce companies such as Flipkart
and Snapdeal have been following the marketplace
model - which was not defined - and attracting large foreign investments.
Marketplaces essentially act as a platform connecting sellers and buyers.
This has led to allegations from time to time by
brick-and-mortar stores that Indian e-commerce companies were flouting existing
policy norms to gain an unfair advantage, given that the government does not
allow FDI in multi-brand retail companies.
It led to a legal challenge in the Delhi high court, even as
the model came under the scrutiny of the authorities such as the Enforcement
Directorate.
Close to $10 billion in funding has been committed to the
sector.
According to the press note issued by the department of
industrial policy and promotion (DIPP), a marketplace model is an information
technology platform run by an e-commerce entity on a digital and electronic
network to act as a facilitator between buyer and seller.
However, DIPP has prohibited FDI in e-commerce companies that
own inventories of goods and services and sell directly to consumers using
online platforms.
The marketplace e-commerce companies will be allowed to
provide support services to sellers on their platform such as warehousing,
logistics, order fulfilment, call centre and payment collection.
The new policy also mandates such e-commerce companies to display
contact details of the sellers online. The warranty/guarantee of products or
services sold online will also be borne by the sellers, not the e-commerce
company.
Amazon funds discounts by sellers indirectly through a route
it calls “promotional funding”. This it how it works:
Amazon recommends the amount of discounts to its sellers on products, but
doesn’t force them to adopt these prices. Sellers, however, go along as Amazon
finances the discounts.
Flipkart’s largest seller WS Retail Services Pvt.
Ltd easily generates more than 25% of the company’s sales while Cloudtail India Pvt. Ltd, the
biggest seller on Amazon India, contributes even more.
Flipkart has been gradually reducing WS Retail’s business over the
past 15 months as it shifts to a marketplace model. Following the new
regulations, Flipkart may have to accelerate its
transition.
Cloudtail India, a joint venture between Amazon.com Inc. and N.R.
Narayana Murthy’s Catamaran Ventures, is now the key growth driver for Amazon
India, generating at least 40% of the company’s sales in some months. Cloudtail is particularly dominant in electronics and
fashion sales, two of the three largest categories for Amazon India (run by
Amazon Seller Services Pvt. Ltd). The new regulations
mean Amazon India may have to find new sellers on its platform.
“While a seller may sell goods at a discount, marketplaces
have now been prohibited from funding discounts through bonus schemes,
marketing cost reimbursement, etc. Accordingly, there is a strong possibility
that prices of products online will revert to levels that are comparable with
offline prices. This could make online marketplaces less attractive to shoppers
and investors.
The share of e-commerce in retail is expected to jump from 2%
in 2014 to 11% in 2019, while the share of physical, organized or modern retail
is expected to shrink from 17% to 13%
The government in the budget allowed 100% FDI in marketing of
food products produced and manufactured in India. In November last year, the
government also allowed a manufacturer to sell its products manufactured in
India through retail e-commerce.
Two
retail associations representing brick-and-mortar retailers, the RAI and the
All India Footwear Manufacturers and Retailers Association, have approached the
Delhi high court arguing that online retail companies have gained an undue
advantage by being allowing access to FDI through which they are able to
provide deep discounts that traditional retailers cannot match.
They also argued that the present retail policy of the
government does not allow such e-commerce companies to directly sell to
customers, but that, in the garb of the marketplace model, such online
companies are directly selling to customers, violating rules.
In an affidavit submitted before the Delhi high court on 21
December, DIPP said the current FDI policy neither permits FDI in B2C
e-commerce nor recognizes the marketplace model in e-commerce followed by
companies such as Flipkart, Snapdeal
and Amazon.