Home / Companies / Start-ups /  Govt warns e-commerce firms on discounts

New Delhi: Online marketplaces that are offering discounts despite the government prohibiting pricing intervention run the risk of violating the law, the department of industrial policy and promotion (DIPP) warned on Thursday.

“If you violate the conditions, you run the risk of (falling foul of the law). We will take care of how to deal with it," DIPP secretary Ramesh Abhishek told reporters.

The government on Tuesday allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called “marketplace model" through the automatic route, seeking to legitimize existing businesses of e-commerce companies operating in India.

According to the press note issued by DIPP, a marketplace model is an information technology platform run by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.

DIPP also notified new rules which could potentially end the discount wars, much to the disappointment of consumers. This is because the rules now prohibit marketplaces from offering discounts and cap total sales originating from a group company or one vendor at 25%.

Many e-commerce portals were offering discounts on their websites on Thursday even after DIPP said on Tuesday that the rules will be effective immediately. “We have not made any new policy, we have issued only some clarifications," Abhishek said. On the rationale behind the 25% cap on sales from group companies, Abhishek said an entity following a marketplace model should not be having an inventory-based model.

“You are only a digital service provider to buyers and sellers. It should be sourcing it from lots of people. Twenty-five per cent is a large window. You can’t have both ways," he said.

The new sourcing norms will have an impact on e-marketplaces heavily dependent on group companies and restrict the deep discounting that had become synonymous with the sector, rating company Crisil Ltd said in a report.

“The e-marketplace sector will undergo gradual transformation in the near term to a more sustainable business model and will focus more on optimizing processes (supply chain, warehousing and overall fulfilment) from deep discounting for customer acquisition strategy," said Amit Bhave, director of Crisil.

Indian e-commerce companies such as Flipkart and Snapdeal have been following the marketplace model—which was not defined—and attracting large foreign investments.

This has led to allegations from time to time by brick-and-mortar stores that Indian e-commerce companies were flouting existing policy norms to gain an unfair advantage, given that the government does not allow FDI in multi-brand retail companies.

It led to a legal challenge in the Delhi high court, even as the model came under the scrutiny of authorities such as the Enforcement Directorate.

DIPP has prohibited FDI in e-commerce companies that own inventories of goods and services and sell directly to consumers using online platforms.

The online marketplaces will, however, be allowed to provide support services to sellers on their platform such as warehousing, logistics, order fulfilment, call centre and payment collection. The new policy also mandates such e-commerce companies to display contact details of the sellers online. The warranty/guarantee of products or services sold online will also be borne by the sellers, not the e-commerce company.

Snapdeal didn’t respond to a mint request for comment. ShopClues spokespersons weren’t available to comment.

“We have never indulged in discounting the sellers’ products on our marketplace. In fact the sellers are in complete control of their products’ selling prices and MRPs (maximum retail price) on our platform. Any markdown or discount on MRP offered on Paytm is offered by the brands or brand-authorized sellers themselves," said Sudhanshu Gupta, vice-president, business, Paytm.

Priyanka Sahay contributed to this story.

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