India’s E-Commerce crackdown
Amazon and Flipkart have been given until the end of January 2019 to comply with new restrictions, announced in late December, that sharply restrict the use of their hefty balance sheets to boost sales on their virtual marketplaces.
India has an internet users base of about 475 million as of July 2018, about 40 per cent of the population. Despite being the second-largest in the world, only behind China (650 million, 48 per cent of the population), the penetration of e-commerce is low compared to markets like the United States (266 million, 84 per cent), or France (54 M, 81 per cent). However, it’s currently growing at an unprecedented rate, adding around 6 million new entrants every month.
As of 2018, the largest e-commerce companies in India are Flipkart, Amazon, ShopClues, Paytm, and Snapdeal.
In December 2018, new regulations for e-Commerce companies were proposed. They are designed to prevent foreign companies from using their vastly greater financial resources to benefit their sales volumes by means of massive cash-back and discount schemes.
The new rules, which are due to take effect on February 1 2019, will prohibit foreign companies that are running e-commerce marketplaces — such as Walmart-owned Flipkart and Amazon’s Indian site — from selling goods sold by businesses in which they hold equity stakes.
India had announced strict new rules for foreign-owned e-commerce companies in December 2018 that have caused fresh headaches for Amazon and Walmart even after they have invested billions of dollars to develop their local businesses.
While the move is intended to strengthen the government’s credentials among India’s millions of small retailers, it has sparked alarm for two of the country’s biggest outside investors. Walmart’s $16bn buyout of Flipkart last year was the biggest foreign direct investment in Indian history, while Amazon has committed $5bn in capital to its Indian operation.
The regulations also state that e-commerce platforms may not “directly or indirectly influence the sale price of goods and services” — a condition that could put an end to the blockbuster seasonal sales promotions that have helped drive rapid growth and become national events.
The rules are intended to appease India’s multitude of small businesses, an important electoral constituency, which has long complained that the platforms give preferential treatment to their partners. They argue that this has created unfair competition and made it difficult for them to challenge large, deep-pocketed e-commerce rivals.
When India opened its economy to foreign capital in the 1990s, it was careful to maintain protection for small retailers. Foreign investment was allowed in single-brand but not multi-brand retail — allowing clothing labels, for example, to open stores but keeping out the foreign supermarket chains that were feared by many shopkeepers.
As e-commerce took off, New Delhi updated these rules for the internet age. Foreign-backed companies would be allowed to run virtual “marketplaces” — platforms enabling independent sellers to connect with customers. But they were barred from selling goods themselves, stopping them from functioning as online supermarkets.
The new rules announced in December, strike hard at practices such as cash back and massive one-time discounts. They stipulate that no seller on foreign-funded online marketplaces can source more than 25 per cent of its inventory from a wholesaler linked to the marketplace — banning sellers set up to shuttle goods between the two. They also state that no entity may sell on these marketplaces if any of its equity is owned by the marketplace or by any of the latter’s “group companies”.
Amazon said it had “always operated in compliance with the laws of the land” and was “evaluating the new guidelines to engage as necessary with the government to gain clarity so that we remain true to our commitment”.
Flipkart said it hoped “to be able to work with the government to promote fair, pro-growth policies that will continue to develop this nascent sector”, adding that it would “ensure our compliance with all Indian laws”.
However, both the companies are privately lobbying the government to allow them more time to comply with the new rules, arguing the January 31 deadline will cause huge disruption to their businesses.
Our assessment is that the new government regulations are aimed at supporting smaller, domestic suppliers and e-commerce companies who cannot match the massive discounts foreign-funded companies provide. We believe that the proposed regulations would help smaller retailers to compete and better manage their business.