The department of industrial policy and promotion recently released Press Note 2 of 2018, wherein it has reviewed and clarified the foreign direct investment policy for e-commerce. The changes are set to come into effect from 1 February. The question that plagues the industry is what will be the impact on the sector. Here’s a closer look at the three major changes in the new policy:

1: Restricted trading on e-commerce platforms by group companies, joint ventures and ‘inventory’ vendors: On trading by vendors and group entities, the old policy placed a restriction in terms of the value of sales from a single vendor or group entity to 25% of the total sales in a financial year. The new policy places a two-fold restriction on sales by vendors, joint ventures and group entities of marketplaces. Firstly, group entities will not be allowed to sell products on the marketplace. Entities in which the marketplace entity has equity will also be prohibited from selling as well. This means that the group companies, subsidiaries and joint ventures of e-commerce players, which allowed vendors to offer huge discounts, will be required to be rejigged if the policy were to be implemented. Secondly, the entities where inventory is controlled by the marketplace entity, will also be prohibited to trade on the marketplace. For this, it is deemed that the inventory of a vendor will be controlled by the marketplace entity if more than 25% purchases of such vendors are from the marketplace entity or its group companies. However, it is not clear whether such a restriction can be imposed on an entity that may not have any FDI.

2: Exclusive deals not permitted: The second restriction placed by the new policy is that the marketplace cannot mandate any seller to sell its products exclusively on its platform. This will severely affect the practice followed by major smartphone manufacturers and/or retailers where they offer smartphones for sale exclusively on platforms like Amazon, Flipkart, etc.

However, there may be occasions where the seller may want to reach a large, established consumer base and, thus, may take a commercial decision (on its own account) to offer its products for sale only through a particular platform. Whether such a situation would amount to violation of the new policy or not, will be an area for further deliberation.

3. Support services to be at an arm’s length: While the old policy allowed provision of support services by marketplace such as fulfilment, logistics, warehousing, advertisement/marketing, payments, financing, etc. to partner vendors, the new policy mandates that all support services should be provided at an arm’s length in a fair and non-discriminatory manner. Generally, any price to unrelated parties is considered arm’s length. With related parties not allowed to participate on the platform, the need for arm’s length pricing is dubious.

With less than a month left, e-commerce players, therefore, will face mounting pressure to come up with major revisions to their business models to overcome the regulatory hurdle.

L. Badri Narayanan is partner and Pooja Vijayvargiya is principal associate at Lakshmikumaran & Sridharan Attorneys.