New E-commerce Norms 2016

Department of Industrial Promotion and Policy (DIPP) has come up with new rules aimed to regulate the e-commerce marketplaces. The key guidelines and its impact on stakeholders are analyzed in the following paragraphs.

The new guidelines have also defined various terms related to the e-commerce sector:

  • E-commerce: E-commerce means buying and selling of goods and services including digital products over digital and electronic network.
  • Inventory based model of e-commerce: In this model, inventory of goods and services are owned by e-commerce entity and is sold to the consumers directly.
  • Marketplace based model of e-commerce: In this model, an e-commerce entity acts as a facilitator between buyer and seller by providing an information technology platform on a digital and electronic network.

Guidelines for FDI in e-commerce sector

Under the new rules 100% FDI under automatic route is permitted in marketplace model of e-commerce and no FDI is permitted in inventory based model of e-commerce. At present, 100 per cent FDI is permitted in B2B (business-to-business) transactions under the automatic route.

Implications

No FDI is permitted in Business to Consumer (B2C) e-commerce. This rule has reaffirmed government’s long-standing position of not allowing FDI in business-to-consumer e-commerce (B2C). No FDI in B2C e-commerce implies that foreign-funded e-commerce players such as Flipkart cannot operate under an inventory-based model. This simply means, an e-commerce company, if funded by foreign venture capital, cannot buy merchandise and stock that inventory in their own warehouse and sell those items on their website to online buyers.

On the other hand, marketplace e-commerce entities will be permitted to enter into transactions with sellers who are registered on their platform only on B2B basis. Further, the scope of marketplace has been expanded to provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services. However, the E- commere entity should not exercise ownership over the inventory since such an ownership over the inventory will transform the business into inventory based model.

25 per cent cap on sales by a single vendor in a marketplace

As per the new norms, an e-commerce entity will not be permitted to sell more than 25 per cent of total sales through its marketplace from one vendor or their group companies.

25% cap on sale through primary sellers

The main problem faced with an e-commerce marketplace model is that there is a low quality of service, shopping, delivery and overall customer satisfaction. Sellers may indulge in malpractices and fraud as there has been several examples in the past. For example, in 2014, a customer who ordered a smartphone on Snapdeal received a bar of soap instead. So, the e-commerce giants like Flipkart and Amazon have created a ‘primary seller’ to nullify the weaknesses of the marketplace model. Cloudtail India Pvt Ltd. is the biggest seller on Amazon India which contributes roughly 40% of the company’s sales. Cloudtail India is a joint venture between N.R Narayana Murthy’s Catamaran Ventures and Amazon Inc. Similarly, Flipkart’s largest seller WS Retail Services which contributes 35%-40% sales has its roots in Flipkart itself.

Implications

With new rules in place, e-commerce entities like Amazon and Flipkart cannot contribute more than 25% to its overall sales through their primary sellers such as Cloudtail India pvt. Ltd and WS retail services respectively. This will provide a level playing field and widen the seller base to include more traditional retailers.

Discounts may be scrapped

New guidelines mandate the e-commerce entities to refrain from indulging in predatory pricing and directly or indirectly influencing the price of goods and services.

Implications

Consumers who were the biggest beneficiaries of discounts will be the losers as these guidelines will result in a reduction of the discounts of products.

Liability rests with sellers

According to the new rules any warranty/guarantee of goods and services, post sales delivery of goods, customer satisfaction will be the responsibility of the seller.

Implications

The e-commerce marketplaces will only act as a technological mediator and will not possess any legal liability. So if a customer has any issue with the service offered then the e-commerce marketplaces cannot be held liable.

How the new rules are likely to impact the traditional brick and mortar and Indian companies as a whole?

The brick and mortar companies and wholly owned Indian online retailers stand benefitted from the new guidelines. This is because the riders explained above with respect to sourcing of products and pricing do not apply to online marketplaces which are completely owned by Indian companies devoid of any foreign investment.
As the new guideline applies only to companies which have FDI, companies like Flipkart and Amazon will be affected and they are expected to comply with the norms. On the other hand, Indian companies with no FDI and companies like Reliance Group, Tata, Aditya Birla Group and Mahindra & Mahindra which are planning to enter the e-commerce segment will have the necessary edge for their growth as they will be able to continue with the discounting model.

What may happen due to the new norms?

The new norms are expected to bring in more FDI in to the e-commerce sector. According to a CRISIL report, the brick and mortar stores which was facing as existential crisis is likely to get benefitted and register growth due to the level playing field offered by the new rules. Also, there is a chance of increase in litigation as there is no clarity in what the guidelines intents to say. This ambiguity may lead to difference in interpretations by different stakeholders. For instance, guidelines says that an e-commerce company providing marketplace services cannot directly or indirectly influence the sale price of goods or services. But what constitutes a move to directly or indirectly influence the price of goods and services is not clearly defined.

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