FDI norms in e-marketplace: Chaos and confusion reign
Rahul Matthan, Partner, Trilegal

With the introduction of new norms for e-commerce marketplaces operating in India, new terms and conditions have come up where none existed before. We first need clarity as to what amounts to inventory if you are a services player. I don't think the government even knows that it has created so much confusion.

Seller vs platform

The new rules say that no e-commerce entity can accept more than 25 per cent of sales from any one vendor. Now, Flipkart has WS Retail and Amazon has Cloudtail as possibly the largest vendors on their respective platforms. With the government's new norm of not having more than 25 per cent of the turnover from a single vendor, they will have to do something about this. One simple solution would be to set up four companies in place of the one they currently have. There could be more elegant solutions, but that is the new reality they will have to deal with.

E-commerce marketplaces are very proactive from the consumer's perspective. The new regulation says that all post sales activity is the responsibility of the seller, and that is going to make an impact on the way in which these entities operate. There are many small vendors happy to sell on Flipkart, Amazon and Snapdeal among others, but they don't have the ability to offer after-market support. If they now have to provide after-sales support, they will find it hard to do so.

Is there any guarantee that brick-and-mortar players will offer a level playing field for online companies?

Similarly, e-commerce players can't offer product warranty. I don't think any of these players had a clear warranty provision, but they would unequivocally offer to repair or replace defective products. Who paid for that? Essentially, the e-commerce companies paid for it, but now that's not allowed because it is the seller's responsibility.

A level playing field

The regulations clearly say that as far as discounts are concerned, the e-commerce entity should not influence the sale price and must maintain a level-playing field. What do you mean by a level playing field? I don't think e-commerce entities are interested in not maintaining a level playing field among all the vendors on their site. But that's not the issue. Instead, the complaint has always been that the brick-and-mortar vendors are unable to compete with the discounts offered by the online vendors. There's no way in which online vendors can ensure a level playing field between them and brick-and-mortar players. After all, is there any guarantee that brick-and-mortar players will offer a level playing field for online companies? It's not within their ability to influence.

Bringing services under e-commerce

Including services within the ambit of e-commerce is one of the biggest flaws of the regulation. It creates a whole host of complications and we are still evaluating how deep this goes. If you look at Ola and Uber, they are aggregators who sell ride services online. In the case of Ola, for instance, all the cabs have the Ola sticker. Does this mean that the cabs are Ola inventory and, therefore, Ola has an inventory-based model? The Press Note has offered only two models – the inventory-based model and the marketplace-based model. If you apply this to aggregators, they would fall within the definition of a marketplace-based model because they only offer a platform. And, on that basis, the guidelines are quite clear that 100 per cent FDI is allowed in a taxi aggregator.

On the other hand, there are companies such as Housejoy, UrbanClap who have a bunch of blue-collar workers who provide services to the customer. Since they have these people on their rolls, and are using them to provide services, it becomes less of a marketplace and more of an inventory model. Of course, you can't treat people as inventory, or skills as inventory, but that's the closest parallel we can get. So it could very directly affect those companies.

Again, Zomato is a clear marketplace because it does not own a restaurant, but FreshMenu has an inventory-based model. This casual introduction of the new rules on a bunch of services is going to have a very serious ripple effect on the on-demand service economy.

There is a provision right at the end of the Press Note that says sale of services over e-commerce platforms is permitted up to 100 per cent under the automatic route, but in the light of the discussion above, this is almost contradictory and, at the very least, unclear.

The worst hit

Any company which has an inventory-based model has been impacted by the new regulations. I don't think there are many inventory players in the business, but even if you are a marketplace player you will now have to deal with additional rules and regulations. The public at large, and consumers, are going to suffer, because many of the advantages offered by these companies will be eroded due to their new compliance obligations. Those who provide online services, on-demand services and app-based services will definitely suffer.

Looking for clarity

Everything was working fine – e-commerce companies were getting big valuations, they had changed the way in which India shops. So why interfere at this stage? I believe the government did not understand the implications of the regulations it had written.

The author is partner at Trilegal Partners.

(As told to Arti Singh)

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