While online marketplaces will have to go back to the drawing board, the move could provide a window of opportunity for brick-and-mortar stores.
The government's decision to tighten FDI norms for the e-commerce sector could benefit offline stores, feels Kishore Biyani, the founder of Future Group, India's biggest offline retailer.
The proposed amendment to the existing norms will prohibit online retailers which receive foreign investment from selling products of companies in which they hold stakes. It also prevents them from entering into exclusive deals for merchandise.
In an interview with Business Today, Biyani lauded the move, saying that it would restrict e-commerce firms to being conduits between buyers and sellers, and not brands unto themselves.
With rising income levels and greater internet penetration, India was seen as the next frontier for companies like Amazon and Walmart, both of which have made significant investments in the country. However, the growth in volumes posted in recent years has been a pyrrhic victory.
To ramp up sales, e-tailers have offered hefty discounts and tied up with vendors for exclusive deals - a cash burn strategy fueled by periodic cash infusions from their parent firms based overseas.
The move to bar e-commerce marketplaces from selling products of subsidiary companies could hit Amazon hardest, as joint ventures such as Cloudtail and Appario have become an integral part of the company’s supply chain.
Flipkart, on the other hand, has forged partnerships with smartphones brands like Oppo and Xiaomi to sell their wares on its platform. Smartphones account for more than half of all sales on e-commerce websites. Walmart-backed Flipkart also owns in-house brands like appliance vendor MarQ, furniture label SmartBuy, and clothing line Roadster.
Foreign-owned e-tailers will have to significantly alter their business models to comply with these new provisions in the law, which will be effective from February 1, 2019.
While online marketplaces will have to go back to the drawing board, the move could provide a window of opportunity for domestic brick-and-mortar stores.
Offline retailers have higher cost overheads, and often cannot compete with e-commerce firms which resort to heavy discounting and predatory pricing. Biyani claimed that the new norms might force many "online groceries" to shut shop, according to a report in Business Today.
The notification issued by the commerce and industry ministry states that "an entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity".
The new rules make it mandatory for online retailers to file a certificate along with a detailed report compiled by the statutory auditor to the Reserve Bank of India (RBI). The documents establishing compliance with government guidelines for the preceding fiscal will have to be submitted to the central bank by September 30.
The commerce ministry’s decision comes on the back of complaints by domestic traders flagging heavy discounts and unfair practices adopted by e-commerce firms. Kishore Biyani recently quipped that the new norms give an opportunity for Indian firms to scale up their businesses and become the next Amazon or Alibaba.
Meanwhile, Amazon has set its sights on acquiring a minority stake in Kishore Biyani-led Future Retail. In November, Mint reported that talks between the two entities were at an advanced stage.
