The government
approved foreign direct investment (FDI) in online marketplaces, experts says many e-commerce companies will have to revise their already
complex corporate structures, adding that there was little clarity on the
impact of new regulations on Internet companies.
The government on Tuesday
allowed 100% FDI in online retail of goods and services under the so-called
marketplace model through the automatic route.
Under the inventory model,
the e-commerce firm buys, stocks and sells goods, while in the marketplace
model, it simply acts as a platform connecting buyers and sellers.
Few clauses & conditions are attached to the government’s approval, however, could either tingle e-commerce
companies or force them to find unique ideas to execute them.
As per media inputs, no group company or
seller on a marketplace can contribute more than 25% of the sales generated.
Two, marketplaces cannot influence product prices. Three, small sellers will
now have to take responsibility of quality of goods and after sales support.
The biggest drift would be for
those who implement a mix of inventory and marketplace. These companies may be
forced to revamp their businesses to abide by the law.
Fashion retailers such as
Myntra and Jabong are moving to a marketplace model but currently depend on one
seller for most sales. While Myntra gets over 90% of its sales from Vector
e-commerce, Jabong’s sales largely depend on Xerion Retail.
Several lawyers and industry
experts point out that the companies which till now have been swinging between
a marketplace and inventory led business will have to take a clear stance soon.
“The new law is effective
since yesterday and hardly gives breathing time to companies to implement the
changes. However, if these companies continue to operate under ambiguity, they
can be severely penalized by the government,” said Akash Gupt, partner and
leader regulatory at PwC India.
While e-commerce giants such
as Flipkart and Amazon will have to find new sellers to reduce dependence on
large sellers, marketplaces such as furniture retailers Fabfurnish and
Pepperfry will have to obey with the law by clearly providing seller name and
details.
The new regulations leave
less room for firms to violate law through alternate structures. The clear
definition of e-commerce marketplace, inventory led business and the 25% sale
norm will stop companies from disguising their businesses under marketplace
model while they are doing inventory led business
Several e-commerce companies
started operations with inventory-led models. However, since FDI wasn’t allowed
in direct online retail, these companies had to be restructured to accommodate
foreign money. Most companies moved to a two-layered structure with a wholesale
trading arm that got all the foreign capital and an independent customer-facing
entity that ran the online platform and sold to the customer directly.
While the regulations around
the wholesale trading and B2C e-commerce model have remained unchanged,
companies find little or no value in this model and prefer to run a
marketplace.
The second condition on after
sales and warranty clearly re-emphasize the role of the inventory model. “There
will be several unintended consequences of these regulations. For instance,
small vendors who only came on to online platforms because of the comfort that
post sale issues would be handled by the e-commerce marketplace may no longer
be willing to trade on these marketplaces.”
The third condition is the
ban on influencing product prices, among other riders for approving FDI in
e-commerce marketplaces.
“E-commerce entities
providing marketplace will not directly or indirectly influence the sale price
of goods or services and shall maintain level playing field. However, it’s
difficult to say how the new rules will be implemented and to what extent these
will be followed.
The end of discounting, if it
happens, would significantly hurt the high valuations of India’s top e-commerce
firms— Flipkart ($15 billion), Snapdeal ($6.5 billion) and Paytm (more than $3
billion)—as well as the rapid sales growth of Amazon India.
Online retail grew rapidly to
$14 billion last year from $1 billion in 2012 fueled by venture capital
investors, who pumped in more than $9 billion over the past two years alone. A
huge chunk of this money has been spent on luring customers through advertising
and, more importantly, discounts.
Many experts, however, said
companies will find new ways to fund discounts though no one had clarity on the
specifics.
Conclusion:- I believe! the new FDI policy will surely consolidate the brick & mortar marketers. There is no doubt, that the e-commerce marketplace will try to gain more and more vendors across India, for fulfilling there customer demand. Snapdeal has already declared that they are going to increase there number of sellers across India. It is a win- win situation for both entities. But, the newly imposed FDI policy will fail to brace the 'Make in India' vision of Prime Minister-Modi. The inventory model could have motivated small manufactures to manufacture their products in India, and sell on e-commerce platform.
