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Government Formally Allows 100% FDI In E-Commerce’s Marketplace Model, But There’s A Twist!

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E-commerce in India is based primarily upon the marketplace model rather than an inventory-based platform. And so far, in the absence of any formal regulations and definitions, it has been thriving upon the investment from venture capitalist and foreign investors. Now the government has formally allowed Foreign Direct Investment (FDI) in these companies but at the same time limited their ability to give heavy discounts to customers.

The authorities have put a clause in new rules which bars the e-commerce companies to directly or indirectly affect the pricing of products on their platform.

E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field,

said a note released on Tuesday by the Department of Industrial Policy and Promotion (DIPP).

And this in effect will put a check on all those heavy discounts used by almost all these companies to attract customers to their platforms. So probably no more Big Billion Days by Flipkart or any other of those massive sale events by others !!

Another important clause in the new rules is that no group company or seller on a marketplace can contribute more than 25% of the sales generated on the site. This may prove even more difficult to deal for the e-commerce giants such as Amazon and Flipkart.

Reason being the seller entities of these companies contribute a lot more than 25% to the sales of these companies.

For instance, Cloudtail India Pvt. Ltd, which is a joint venture between Amazon and Narayana Murthy’s Catamaran Ventures, contributes sales in electronics and fashion categories which are two of the three largest categories for Amazon, at times even accounting for at least 40% of the company’s sales in some months. And same is the case with WS Retail of Flipkart which definitely contributes more than 25% of the sales on Flipkart.

This will also affect the sales of high-value items such as smartphones which are at times exclusively sold on these platforms through their partnerships with companies such as Xiaomi or Motorola.

So while 100% FDI will definitely boost the e-commerce in the country further but in a way, they have also left these companies to do some major brainstorming to deal with the unexpected twists in the clauses.

On a more positive side though, these restrictions can also eventually lead to better financial health of these companies in future as now there is a limit on cash burning through heavy discounting.

The government had already allowed 100% FDI in B2B e-commerce. The new regulation has allowed FDI in the marketplace model on which currently operations of all e-commerce companies are based. These companies just provide a platform where sellers can sell their products to consumers.

Inventory based model basically implies direct selling by e-commerce companies where they store products in their inventory and sell them directly to the consumers. And the government has continued its ban on such direct retailing by these companies.

However,  DIPP has said that the companies may provide support services such as warehousing, logistics, order fulfilment, call center, payment collection etc. to the sellers but they won’t have any ownership over the inventory as that would lead to inventory based direct selling practices.

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