IMPACT OF NEW FDI GUIDELINES ON ECOMMERCE IN INDIA

Abstract

As we all know India is among the fastest growing economy of the world , thus it is very much important to have government intervention and huge investment inflow in form of Foreign direct investment in large economy like India to stabilise and increase the growth of ecommerce industry in the economy. In India digital penetration has increased significantly, according to statistical data internet use has increased to 429.23 million user in India and is expected to reach around 830m by year 2021 . December 26th, 2018 saw the government launching stricter guidelines that govern foreign direct investment (FDI) in e-commerce firms. The DIPP updated Press Note 3 that provides guidelines on the functioning of an e-commerce marketplace. The guidelines that will come to effect from February are stricter in nature, causing companies such as Amazon India and Flipkart to go back to the drawing board. This study takes a look at how the ecosystem may get impacted with the updated guidelines. The new norms bar exclusive tie-ups between e-commerce firms that follow the ‘marketplace model’ and vendors using their platform. In a marketplace model, the ecommerce firm is not allowed to directly or indirectly influence the sale price of goods or services, and is required to offer a level playing field to all vendors. To emphasise this point, the new norms said cashback or services, such as quick delivery, offered by e-tailers have to be applicable to all vendors on their platforms. It also said that if a vendor sells more than 25% of its wares through an ecommerce marketplace, the latter will be deemed to have an inventory model, in which FDI is not allowed. The 25% cap was there earlier, but the onus of ensuring it, is now firmly on the e-commerce platform, so that it does not find itself on the wrong side of the law. It further said that e-commerce firms will be barred from selling wares of related parties on the inventory, of which it has a say. How much the changes are significant as its enforcement will affect the flexibility that ecommerce platforms had in doing business, and force them to be neutral to all vendors will be the major objectives of this research project. E-commerce companies, such as Amazon and Flipkart, have been luring customers with deep discounts and exclusive offerings. The bar on such firms ‘influencing’ pricing and mandating vendors to sell exclusively on their platforms may have a major impact on customer behaviour. Most customers shop online for deep discounts and exclusive offerings, which may not be available on other online platforms, or in offline stores. This will, in turn, have an impact on the revenue and growth of e-commerce companies in India. This clause will also have an impact on private labels being sold by e-commerce companies. Over the last few years, companies such as Flipkart, Myntra and Amazon India, among others, have been introducing private label/in-house brands to garner more customers through exclusive offerings at lower costs and higher margins, so that their path to profitability is shorter and smoother. The profitability target of these companies might now have taken a big hit. Also, the bar on e-commerce companies from selling products from entities they have a stake in, could affect Amazon because it has a stake in its two major seller entities, Cloudtail and Appario. What are the impacts and how much is the extent of the impacts on the two major ecommerce entities in India? What are the ways these companies can get away with the problems and losses the new guidelines bring in? Which are the other stakeowners of the policy change by the Government of India? What is the rationale behind the changed new guidelines and what overall benefit do they bring to the nation as a whole are the major questions which have been tried to find the answer to in this project. The change in the structure of the of the organization and the business model due to the norms is also one of the main factors for the sustainability of the e-commerce players.