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Last Updated : Feb 08, 2019 08:30 PM IST | Source: Moneycontrol.com

E-commerce FDI rules: E-tailers skirt rules to ensure it is business as usual

Foreign companies have been able to take advantage of the ‘design flaws’ in the new policy, which they felt was going to hinder their successful established practices.

Priyanka Sahay @priyankasahay
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Representative Image

Priyanka Sahay 

Moneycontrol News 

Amazon's biggest seller Cloudtail is back in business. Appario will join the party soon and it took Amazon barely a week to get around the changes in e-commerce regulations.

Foreign companies have been able to take advantage of the 'design flaws' in the new policy, which they felt was going to hinder their successful established practices.

The rules have multiple loopholes and law firms are having a great time exploiting some of these to give their multi-billion dollar clients the best solutions.

To begin with, guidelines for Foreign Direct Investment (FDI) on e-commerce sector says 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."

This means that in case a seller has an investment from a marketplace or any of its group companies, it will not be able to sell its products on the respective marketplace.

In order to comply with this norm, Amazon pared its stake in Cloudtail’s parent firm. The idea was to ensure that Prione Business Services, which owns Cloudtail, was no longer a group company of the marketplace.

A report in The Economic Times said that NR Narayana Murthy's Catamaran Ventures increased its stake in Cloudtail's parent company Prione Business Services to 76% from 51% earlier, reducing JV partner Amazon Asia’s stake to 24% from 49%.

However, while it addresses the issues mentioned in black and white, it can be argued that the intent of Press Note 2 still remains unaddressed.

The idea was to bring about a level playing field between the offline retailers and the marketplaces. But with this restructuring, Amazon won’t be losing its vice-like grip on the market.

Offline retailers had also warned the government of such a scenario early on and the idea was to ensure that the rules were implemented in letter and spirit.

They are now seeking government's intervention in the case, calling for a ban on indirect ownership in the sellers.

Another controversial topic is that of private label products sold in the marketplaces.

Conventionally, under this, marketplaces tie up with manufacturers for the production of goods under a specific brand name.

Private label products help marketplaces control the production and price of products under specific categories. It essentially gives a marketplace an added advantage which then forces then other brands on its platforms to keep the prices down.

In some instances, marketplaces can also have equity in the companies that sell products on their platforms. They also mostly have exclusive tie ups with these companies.

This again flouts the Press Note 2 in more ways than one. Press Note 2 states that, "E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field."

Private label products are guilty of doing all these things and surprisingly, just a week after announcing Press Note 2, they went ahead to state that the new rules will not impact private label products.

In its notification on January 4, it stated the government was not concerned about the nature of the products sold on the websites.

This development was strange because the nature of the products will only decide whether or not it is influencing the market and competition.

With sellers crying foul over Amazon's latest move, it will be interesting to see if the government succumbs to their demands and issues a clarification on indirect equity holding in sellers.

The government is caught between the devil and the deep sea as any move against foreign entities will send wrong signals to global investors.

It also happens just a few months after global retail giant Walmart acquired a majority stake in Flipkart.

There's also been chatter about the need to come up with Press Note 2 in such a haste. Many saw this as a politically motivated idea as it was suggested that the government wanted to appease the traders who form a huge vote bank of the ruling BJP.

The rules were being flouted for the past two years after the government came up with Press Note 3 in 2016. The ideal way would have been to set up a committee and probe the companies flouting the norms.

It will be interesting to see if the government now plans to set up a body to scan the business models of marketplaces in the country.
First Published on Feb 8, 2019 08:30 pm
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