The grinch that stole Christmas for e-tailers

By Vaibhav Kakkar and Keshav Pareek, L&L Partners

The day after Christmas, the government issued a press note clarifying its stance on foreign direct investment (FDI) norms for e-commerce marketplaces, in a bid to mollify trade associations that were protesting against the deep discounting by e-commerce companies and the lack of a level playing field for small traders. This clarification introduced the concept of disruptive norms, without any stakeholder consultation, and acts as a diktat to e-commerce marketplaces to be purely technology platforms providing some additional services such as warehousing, logistics, order fulfilment, thereby restricting their roles severely.

Vaibhav Kakkar
L&L Partners

In addition to the existing restriction on inventory ownership, e-commerce firms will not be allowed to exercise control over inventory now. A company is deemed to exercise control over inventory of a vendor if more than 25% of purchases of the vendor are from the e-tailer or its group entities. Under the FDI rules, a “group company” is defined as an enterprise which, directly or indirectly, are able to exercise 26% or more voting rights, or appoint more than 50% of directors on the board of another company.

Marketplaces, through their wholesale arms, were purchasing products in bulk directly from OEMs at significant discounts. They were, in turn, selling these products at a discount to several vendors, who were then retailing it on the marketplace. This was allowed, as 100% FDI under the automatic route was permitted in B2B e-commerce. However, with the new restrictions, e-tailers will be significantly restricted from acting as wholesalers to the vendors who are selling on the platform.

While direct equity participation in sellers is clearly prohibited, it remains to be seen whether an indirect equity participation at the holding company level by the marketplace entities or its group companies would also be restricted.

Keshav Pareek
L&L Partners

Another ambiguity is whether an unconnected vendor can now sell all its products on the marketplace, which was earlier capped at 25% of total sales and whether it would be deemed as an indirect control by the marketplace over the inventory of the vendor.

Also, e-tailers will not be permitted to sell private label products on their platform. The Department of Industrial Policy and Promotion subsequently clarified that the new guidelines do not impose any restriction on the nature of products to be sold. However, unless the restrictions remain unchanged, e-tailers may continue to have challenges in selling private label products on their platform.

Further, the policy prohibits mandating vendors to sell products exclusively on their platform. Such exclusivity provisions are widely prevalent in commercial deals and these decisions may be driven purely by commercial reasons. The restriction goes against the principle of party autonomy and appears to be excessive and not in accordance with the objectives that are sought to be achieved.

The policy also requires that services provided by marketplaces or their group companies to the vendors are fair, non-discriminatory and on an arm’s length basis. The policy looks to apply the principles of equal opportunity, usually applicable to the government and its agencies, to a private marketplace entity, which flies in the face of contractual sovereignty.

Instead of introducing these policy measures, the government could have focused on ensuring better enforcement of existing norms and expedited disposal of pending complaints against e-commerce companies, especially with the Competition Commission of India already serving as a watchdog to prevent anti-competitive practices including predatory pricing.

It also seems unfair that these measures would not apply to domestically owned e-tailers, though organized Indian retailers that have deep pockets could also pose similar challenges to small traders. These measures also tend to compromise the benefits to consumers.

Moreover, the deadline of merely a month for ensuring compliance seems unreasonable. It is likely to be challenging for existing players to either unwind or modify existing structures, especially given the massive foreign investment.

This is likely to impact FDI into India and may not be received well by foreign investors who seek regulatory certainty. Given that banks and non banking financial companies are cash-strapped, it remains to be seen how small traders will meet their working capital and infrastructure needs, which were hitherto being supported by e-commerce companies.

Vaibhav Kakkar is a partner at L&L Partners and Keshav Pareek is an associate. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.


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