How do the FDI rules work for e-commerce?

There are two parts to international investment in e-commerce in the country: Marketplace and inventory.

The Indian law allows 100 percent FDI (foreign direct investment) in e-commerce platforms that act as a marketplace (where sellers and buyers meet) which is defined as a tech platform. However, 100 percent FDI is not allowed in inventory based model of e-commerce where the goods and services sold are owned by the company and is sold directly to customers.

The idea was to protect small retailers in India that largely belong to the unorganized sector and do not have large capacities like the American players to buy on a large scale in order to sell at a discount.

The loophole

As giants like Flipkart (in which Walmart holds a majority stake) and Amazon can only operate as a marketplace, they have wholesale units that buy goods in bulk and sell them to their vendors that are listed on their platform. These vendors, in turn, sell these products to customers at discounted rates.

The regulations that were already prevailing before 1 February 2019 did not allow these e-commerce firms to exercise ownership on the goods that were sold on their websites. This led to companies like Amazon and Flipkart develop complex seller structures that allowed them control over the inventory while complying with the regulations.

Traders and small domestic online sellers accused these e-commerce giants of manipulating the rules using structures to offer deep discounts. Various trader bodies had also alleged that these entities were giving preferential treatment to certain sellers.

These allegations were denied by them.

New rules

1 February 2019 onwards, if a vendor purchases more than 25 percent of his/her inventory from the marketplace (Amazon or Flipkart, for example), he/she will be considered as controlled by the marketplace. This will force vendors to not make bulk purchases from wholesale units of these e-commerce companies.

This rule will replace the earlier rule that said that an e-commerce company could allow the retail sales of a vendor to cross 25 percent of the value of overall sales of the marketplace in one financial year.

Equity interest

The new rules also do not permit any entity in which the e-commerce company or any of its group companies hold a stake in to sell on their online platform.

It is a problem for businesses like Amazon that has been picking up stakes in offline Indian retailers to expand its market share, which includes a 5 percent stake in the fashion retailer chain Shopper's Stop.

To comply with the rules and void any violation, Amazon.in has already taken off products from sellers like Cloudtail and Appario, in which they have an equity investment.

Other changes in rules

The e-commerce marketplaces cannot ask merchants to sell their products exclusively on their platforms. However, the sellers can choose a preferred online partner.

This means that through products like certain brand smartphones will be still be sold on these online platforms, they will not be advertised under the banner 'exclusive' and provide more freedom to the product makers to sell elsewhere.

The e-commerce platform has to provide services like fulfillment, logistics, and payments to all the sellers on the platform in a fair manner. In case the service is provided to one seller and not to another in a similar situation, it will be deemed unfair and discriminatory under the new rules.