Angel tax - here is always scope for good old fashioned legislation where you clearly identify the mischief and set the right expectations in terms of compliance, rather than go in circles defining exemptions and exceptions to nowhere.
Regulation by distraction: How India’s new e-commerce regulations do little for SMEs and small retail
By Suhas Baliga
The effects of the Indian government’s recent shakeup of eCommerce regulations are continuing to ripple throughout India’s eCommerce sector. With Amazon’s largest seller, Cloudtail, scrambling to restructure and Walmart considering an exit from Flipkart, it’s too early to see the full implications of the new eCommerce standards. However, while foreign-owned platforms contemplate how to re-structure their business, Indian-owned platforms with deep pockets are already hard at work establishing themselves in the recently vacated online retail space.
Reliance is poised to take advantage:
The key player in this is Reliance Industries, chaired by Mukesh Ambani. Ambani recently announced that the company would be investing 100 billion rupees ($1.4 billion) in the eastern state of West Bengal. A portion of this amount is intended to fund the company’s new eCommerce venture. According to financial experts, two key factors make Reliance a strong potential presence in the eCommerce space:
The company already has platforms in place for entertainment, financial services, payment gateways, and in-store retail. The addition of eCommerce is a logical next step that the company is well-prepared to take.
As an Indian-owned retailer, Reliance does not have to deal with the same eCommerce restrictions as foreign-owned platforms such as Amazon or Flipkart.
Reliance is captalizing on the gap left behind by the exit of foreign-owned eCommerce retailers. According to Bloomberg, in spite of Cloudtail’s restructuring efforts, which allowed the retailer to return to Amazon.in, “thousands of products remain missing from the virtual shelves of Amazon and Flipkart, which together account for 70% of India’s online retail market.”
Mixing ownership requirements with regulating monopolistic / unfair trade practices:
A survey cited by Money Control showed that Indian residents were experiencing the following issues as a result of the new restrictions on foreign-owned eCommerce platforms coming into force:
● An increase in the overall price of products
● An increase in the cost of shipping
● An increase in the length of shipping time
● A decrease in the discount amounts offered
● A decrease in product availability
● Multiple products being completely unavailable
Some of the changes that find their place in the regulations to regulate foreign owned e-commerce platforms that we described in detail in our last post are well-intentioned. For instance, the attempt to create a level playing field among sellers on e-commerce platforms. While these ideas and regulatory strategies require further development to prevent monopolistic practices, they appear to be a good start.
However, they are selective and misdirected. By applying these requirements only to foreign owned ecommerce platforms, it is possible to argue that the beneficiaries will NOT be mom and pop stores or SMEs, but large Indian companies with deep pockets. In short, one type of exploitation being replaced by another, in an atmosphere of constrained competition. This makes it detrimental not only to customers but also to healthy competition in the ecommerce space.
This is further exacerbated by the fact that the application of these regulations make it difficult for startups and new ecommerce platforms which will find it difficult to comply with regulations designed for companies like Amazon. While not applicable to Indian owned startups, it must be noted that Indian startups especially early technology startups rely heavily on international capital and valuations, which will now dry up. Also at this stage, it is very likely that the competition that small retailers are facing from Amazon/Flipkart will be replaced by competition from Indian companies who operate like Amazon/Flipkart. Which could be worse!
Who else could benefit?
Single-brand retailers would also do well to explore new avenues of establishing themselves in the current market. 2018 brought new freedom to single-brand retail chains. As yu will find in more detail here, in years prior, “foreign players could own up to 49 percent in a local single-brand retail chain but had to approach the department of industrial policy and promotion (DIPP) for a go-ahead to acquire the remaining 51 percent. Now they can fully own their Indian operations without applying for permission.”
While single-brand retailers have had this freedom for over a year, the current gap in the marketplace could prompt many of them to seek new methods of developing themselves.
Where does this leave us?
At this point in time, it is difficult to say whether or not foreign-owned eCommerce giants have been permanently pushed off the playing field of the online retail sector in India. Regardless, Indian-owned industry leaders, such as Reliance, clearly see the current legal landscape as an opportunity to enter and overtake the market. Small startups, single-brand retailers, and other parties looking to participate in the Indian eCommerce market would do well to follow Reliance’s example and begin to look for ways to smoothly enter the market or increase their current standing in it. This however looks challenging given that the government is selectively regulating the ecommerce space.
If the intention behind regulating ecommerce platforms is to prevent dominance, unfair trade practices and to create a level playing field for all retailers, the government would do well to open up a conversation on how to regulate all ecommerce platforms and not just the ones with foreign investment. Otherwise, not only is the current legal position detrimental in the short run, but will not serve its purposes in the long run.
E-Commerce in India: Dark times ahead but will they last?
In a previous post, we discussed evolving issues surrounding India’s attempts at combating the displacement of small local businesses by large online retailers. A subsequent post explored these regulatory efforts in further detail. As additional regulations come into effect as of February 1, 2019, it appears that the regulatory incoherence continues.
Key takeaways from a Review of policy on Foreign Direct Investment (FDI) in e-commerce are:
ECommerce entities that provide a platform for selling goods are not permitted to own or control the goods sold on the platform. In this context, control is defined as the entity being the vendor behind more than 25% of the purchases made on the platform. This definition of control also applies to group companies owned by the eCommerce entity.
An entity that owns shares of an eCommerce platform (or its group companies) cannot sell its products on the platform.
ECommerce platform owners are not permitted to require a seller to sell their product exclusively through the platform.
ECommerce platforms are not allowed to influence prices (either directly or indirectly). A platform is required to provide the same services at the same levels to every vendor participating on the platform. These services can include things like fulfillment, warehousing, advertising, payment processing, or financing.
Every eCommerce entity must provide a report of statutory auditor and a certificate confirming compliance to the Reserve Bank of India by September 30 of every year.
If the government is invested in the growth of organized retail, offline and online, displacement of small retailers is inevitable. Merely discriminating between them on the basis of whether or not there is foreign ownership will not result in preventing their displacement. While the efforts so far have obviously not succeeded – they have brought with them an onslaught of unintended consequences. Foreign investors such as Amazon and Flipkart will now find themselves further constrained in comparison to eCommerce platforms owned by Indian residents.While at the same time, Indian owned eCommerce platforms are not subject to similar restrictions. Furthermore, the restrictions themselves are likely to face massive customer backlash.
The regulations explicitly promote the idea of a level playing field for all, only in name. Any platform will inevitably have small and large sellers with different amounts of bargaining and pricing power. Separating ownership of the platform from its participants, only if the platform has foreign investment – is logically incongruous. At present, it appears that the sole motivation behind the revised regulations is to appease a troubled votebank – the mom and pop stores who are still suffering the consequences of GST (tax reform) and demonetization. Whether or not politically effective, it places constraints on the growth of organized retail. This is in turn has consequences across the chain – from manufacturers and farmers, to customers. Like all regulations that are sub-optimal, protectionist and politically motivated, we hope that these too come crashing down on their own weight of incoherence and the fragile basis on which they are constructed. However, it is likely that enough damage would have been caused by the time it all plays out to the end.
As expected, according to a Reuters report, the effects of this are already being felt throughout the country, as starting on the night of Thursday, January 31, large online retailers such as Amazon, Cloudtail, and Shopper’s Stock began purging their platforms of items in an attempt to comply with the new regulatory framework. The report cited an unnamed source who said of the matter, “[Amazon India] has no choice, they are fulfilling a compliance requirement...customers will suffer.”
Dark times ahead for eCommerce, which atleast till recently seemed like a promising story!
India's defence procurement don't help Indian ventures and innovators
Defence procurement should be subject to transparent processes that ensure that Indian companies, big and small, compete on a level playing field. The selection of a large (and failing) conglomerate with no prior experience, as is the case with Rafale, would not have been possible if the government had directly procured under a sophisticated award process.
Read more by Suhas Baliga in today’s Mint.
