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!
