In a major setback to major e-commerce entities in India like Amazon and much to the delight of the small Indian traders, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India ("DIPP") has on December 26, 2018 issued a Press Note 2 (2018 Series) ("Press Note 2 of 2018 Series") modifying the policy on foreign direct investment in e-commerce. The new policy is slated to come into effect from February 1, 2019. Vide this clarificatory Press Note 2 of 2018 Series, the DIPP has imposed new restrictions on the e-commerce companies, which might have a considerable impact on the business models currently adopted by major e-commerce entities in India, such as Amazon.
It is pertinent to note that even prior to the DIPP issuing the Press Note 2 of 2018 Series, foreign direct investment was not permitted in 'inventory-based model of e-commerce' and 100% foreign direct investment under automatic route was permitted only in marketplace-based model of e-commerce. Prior to the issuance of Press Note 2 of 2018 Series there was a restriction on an e-commerce entity to permit more than 25% of the sales value on financial year basis through its marketplace from one vendor or their group companies. Further, an e-commerce entity providing a 'marketplace' was not allowed to exercise ownership over the inventory i.e. goods purported to be sold.
Many of the e-commerce entities in India created complex corporate structures to get around these requirements. For instance, when the DIPP restricted large sellers on e-commerce platforms from contributing more than 25% of sales, the online retailers set up complex structures to get around the legal loopholes by mandating other sellers to buy from those large sellers and then in turn sell those products on e-commerce marketplaces. In other instances, large sellers formed multiple stepdown entities, which sold their products separately on online marketplaces. By putting in place complex structures, the major e-commerce market players were leveraging on the fine line distinguishing between an 'inventory-based model' and 'market-place based model' of e-commerce. These structures also helped these e-commerce market players to offer heavy cash-backs, put in place prime delivery models or selling private label products which clearly put the traders 'outside their system' in a detrimental position vis-à-vis the seller entities which were part of the larger eco-system created by major e-market players.
The Press note 2 of 2018 Series appears to be an effort by the Government of India to plug in these loopholes. The Press Note 2 of 2018 Series now provides that inventory of a vendor will be deemed to be controlled by an e-commerce entity if more than 25 percent of purchases of such vendor are from the marketplace entity or its group companies. Further, in what could possibly be a big jolt to the online e-platforms like Amazon, the Press Note 2 of 2018 Series prohibits any entity having equity participation by e-commerce marketplace or its group companies or having control on its inventory by e-commerce marketplace entity to group companies, to sell its products on platform run by such marketplace entity. This clarification will have a direct impact on the business modes currently being followed by big e-commerce market players in India.
Press Note 2 of 2018 Series not only restricts group companies of e-commerce entities from providing cashback to buyers, it also provides that e-commerce market place will not mandate any seller to sell any products exclusively on its platform, which again was a common practice being followed by the major e-commerce market players.
The Press Note 2 of 2018 Series which has brought in as an unpleasant close to 2018 for most of the major e-commerce players in India is widely being looked at as the NDA Government's bait to the trader community before the impending general elections. Whilst the DIPP is expected to issue some clarifications on some of the interpretational issues in the Press Note 2 of 2018 Series, the move by DIPP to issue Press Note 2 of 2018 Series has certainly forced e-commerce players to go back to the drawing board to (re)consider their business models.
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