Bengaluru: The norms for foreign direct investment (FDI) in e-commerce put out on Wednesday bars e-commerce firms from selling products of entities in which they have an equity stake. This may effectively lead to Amazon offloading its investment in Cloudtail and Appario, which forms majority of its sales.
If Amazon plans to sell its stakes in the two companies, for the first time these sellers will be valued on an independent basis, providing an insight into the valuation of these large sellers on the platform, whose sales itself account for hundreds of millions of dollars every year.
While Cloudtail is a joint venture between Amazon and N.R. Narayana Murthy’s Catamaran Ventures, Appario is a joint venture between Amazon and the Patni Group.
Analysts say that while Amazon has been slowly and continuously diversifying sales from Cloudtail and Appario, the e-tailer may have to offload its stakes if it wants to work with these entities.
“There should be a divestiture of stake from the marketplace entity or its group company. It could be a sale to an Indian entity or to an entity that is completely unrelated," said a legal expert, requesting anonymity. “It’s likely to be a divestiture because the intent of this policy is to ensure that the vendors have to be unrelated to the marketplace and have a level-playing field to sellers."
Most large e-commerce firms previously exploited loopholes in existing FDI rules and created complex structures to get around the norms.
For instance, when the government introduced rules that restricted large sellers on platforms such as Flipkart and Amazon from contributing more than a quarter of sales, online retailers set up structures to get around those loopholes by mandating other sellers to buy from those large sellers and then in turn sell those products on e-marketplaces. In other instances, large sellers formed multiple entities, which sold their products separately on online marketplaces. The latest update of Press Note 3 by the DIPP (Department of Industrial Policy & Promotion is aimed at plugging those loopholes. However, some experts believe that lawyers will find a way to work around the updated guidelines as well, which come in effect from February.
“The whole celebration around this policy will not make sense if the lawyers are able to work around the new policies," said an analyst tracking the e-commerce sector, requesting anonymity. “Companies are looking at changing the structure and work around it because the new guidelines will also impact their private label sales, which will in turn, hurt their profitability plans."
That said, some analysts believe that offloading equity may not solve Amazon’s problem entirely. “Even if Amazon offloads the equity from Appario and Cloudtail, the press note says no marketplace can mandate any seller to sell products exclusively on its platform only," said an investment banker, requesting anonymity. “This means getting rid of the equity will still not be a complete solution."