On December 26, 2018, the Indian government unexpectedly announced a revised FDI policy for e-commerce. Since 2010, when it first allowed 100% foreign investment in business-to-business e-commerce, international firms such as Amazon set up intricate joint-venture and holding company structures to cleverly navigate the Indian e-commerce landscape. As marketplaces are technically technology platforms that facilitate trade between buyers and sellers, existing e-commerce marketplaces in India raised large amounts of foreign funding as a way to allow international firms to penetrate the retail landscape in the country. The framework for FDI in e-commerce also paved the way for Amazon to establish a significant foothold in the country with its marketplace model and complex ownership structures with vendors, and so provide stiff competition to homegrown online retailers. While several subsequent revisions to the policy for FDI in retail and e-commerce were welcome and opened opportunities for further growth of foreign entities, the latest one is rather limiting. Moreover, market leaders claim that the time given to alter their existing corporate structure is rather short and may even disrupt trading in the short term. Earlier versions of the policy iterated that:

• FDI is allowed only for a marketplace model and not an inventory-based model of e-commerce.
• More than 25% of a marketplace’s revenues should not be from a single vendor or its group companies.
• A marketplace should not exercise ownership over the inventory or goods sold through the site.
• E-commerce marketplace operators “will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.”

In addition to emphasizing the abovementioned rules, here are other key guidelines that need to be followed as per the circular dated December 26, 2018:

• A vendor’s inventory will be considered as controlled by a marketplace entity if over 25% of it is purchased from the marketplace or its group companies.
• E-commerce marketplace operators cannot mandate exclusivity, i.e. they cannot ask sellers to sell particular products exclusively on their platform.
• A marketplace operator or companies in which it has equity participation can provide services, such as warehousing, logistics, fulfillment, advertisement, marketing, payments, financing and more, to vendors on the platform. But these services need to be provided “at arm’s length and in a fair and non-discriminatory manner.”
• If certain terms of services provided to vendors are made unavailable to other vendors, it will be considered discriminatory.
• An e-commerce marketplace entity will need to furnish a certificate and a report by a statutory auditor confirming compliance to all the rules laid out in the circular by September 30 each year.

What this Means for the Major E-Commerce Players Amazon and Flipkart dominate the Indian e-commerce landscape. At the outset, it seems like these rules will curb some of the competitive advantages exercised by both firms through their scale, funding and partnerships. Amazon has long navigated some of these rules by investing in vendors that sell on its platform. Cloudtail is by far its most well-known vendor and is a joint venture between Amazon and Catamaran ventures. It also has an exclusive partnership with mobile phone maker OnePlus while Flipkart has exclusive partnerships with Xiaomi and Oppo. Amazon holds a 5% equity stake in Indian department store group Shoppers Stop which in turn has an exclusivity agreement with Amazon Seller Services and is a seller on Amazon’s India site. The e-commerce firm has sought clarity on what the new rules mean with regard to this arrangement. There were reports in early November 2018 that Amazon may pick up a stake in Future Retail, part of conglomerate Future Group, which operates India’s largest supermarket chain Big Bazaar. This deal may be on hold because the changes to the FDI policy would mean that Future Group’s banners cannot sell on Amazon. For Flipkart, it would mean that Walmart may not be able to sell through the e-commerce marketplace. Amazon has committed nearly $6 billion to investments in India and Walmart invested $16 billion in Flipkart last year. The new rules mean that Amazon and Walmart may have to revisit their current ownership structures in the Indian entities and vendor companies. What this Means for Other E-Commerce Players and Retailers Domestic retailers and e-commerce companies that have not been funded significantly by foreign entities are keen to see the new rules implemented sooner rather than later, stating that it would level the playing field. When Amazon and Flipkart sought an extension to the February 1 deadline, domestic e-commerce firm Snapdeal, which almost collapsed last year despite receiving nearly $2 billion in funding over 12 rounds that included high-profile investors such as Alibaba, Softbank and eBay, voiced support for the new rules. The company sent a statement to private news agency Indo-Asian News Service saying, “Snapdeal supports the immediate implementation of the current FDI policy on e-commerce so that marketplaces are not misused to run inventory operations.” On several occasions, India’s small and medium-sized businesses and local mom-and-pop shops have complained to the government that large e-commerce firms create artificial markets by exercising control over their inventory and offering deep discounts. Trader lobbies have been vocal in welcoming this move. Trading body Confederation of All India Traders told news site Inc42 that this is the first time that the government has listened to the concerns of small traders and that the decision “testifies that (India’s) policies are sovereign.” The All India Online Vendors Association, a trading body for e-commerce retailers, told the same news agency that, as these rules were not strictly enforced in the past, it led to “a duopolized market” and that the government should take measures to ensure that the new policy is properly enforced. What it Means to Consumers Until marketplaces are able to work out the most optimal ways to comply, they may have to pull back items sold by their group companies, cut deep discounts on products and hold back on their exclusivity agreements with sellers. Shoppers that leveraged Amazon Prime to receive items quickly or buy items exclusive to Amazon or Prime members may have to buy from a limited choice of goods or look for better deals at other retailers. In the Interim… Brands and sellers, such as OnePlus, have considered re-wording the terms of their agreements with marketplaces. In fact, OnePlus India General Manager Vikas Agarwal told the Press Trust of India that the mobile phone maker “never really had an exclusive commitment to Amazon.” He added that it has been its “choice” to “sell exclusively” on Amazon and not due to a contractual agreement. Indian newspaper The Economic Times reported that top executives at Flipkart and Amazon have informed vendors that sell exclusively on their platforms that modifications to the language of agreements will allow them to continue selling and that it would be business as usual on February 1 and beyond. India’s e-commerce landscape has seen several changes over the years in terms of FDI policy revisions and firms like Amazon and Flipkart have been able to hold their ground despite these. We outline some of the key changes in the table below.   [caption id="attachment_69047" align="aligncenter" width="700"] Figure 1. Timeline of Key Developments in FDI Policy for the Retail Sector[/caption]   Coresight Research View: New Rules to Have Little Impact in the Long Term Players such as Amazon have managed to steer around the FDI rules despite the many changes over the years. We think these new rules will have a short-term impact on selling until the e-commerce marketplaces work out new contracts and re-word exclusivity agreements with existing vendors. In terms of ownership structures, international companies may need to look at innovative ways of partnering with domestic retailers to be able to sell freely online until there is a significant upheaval to the existing rules.