Photo: iStockphoto
Photo: iStockphoto

E-commerce firms eye loopholes to keep discounts alive

While some mask such offers as cash-backs, others use complex ways of funding sellers to stave off scrutiny

New Delhi/Bengaluru: E-commerce companies across the board are trying to find new ways to continue offering discounts after new foreign direct investment (FDI) regulations prohibited online marketplaces from influencing prices on their platforms. However, neither the new rules nor a warning by a senior government official has succeeded in stopping online marketplaces from offering deep discounts.

While some companies mask these discounts as cash-backs, others are optimistic that their complex ways of funding sellers would not bring them under the scanner.

“We give discounts to sellers to empower them and not to customers. Nowhere does the recent regulation question the marketing costs we have (to bear) to help the merchants selling on our platforms," said a senior industry expert and an adviser to e-commerce firms, requesting anonymity. “This (discounting) if contested, will not stand in a court of law."

Last Tuesday, the government allowed 100% 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. However, the government said marketplaces cannot influence pricing of products and services on their platforms, directly or indirectly.

A couple of days later, Ramesh Abhishek, secretary in the department of industrial policy and promotion, warned that online marketplaces offering discounts despite the government prohibiting pricing intervention run the risk of violating the law.

It isn’t immediately clear if the new rules apply to all online businesses or not. However, several lawyers Mint spoke to confirmed that the law covers a wide range of Internet companies including online travel agencies, cab-hailing services, hotel start-ups, home services providers, food ordering apps and grocery delivery apps.

The end of discounting, if it happens, would also significantly hurt the steep valuations of India’s top e-commerce firms—Flipkart ($15 billion), Snapdeal ($6.5 billion) and Paytm (more than $3 billion)—as well as the rapid sales growth of Amazon India.

Flipkart, Snapdeal and Amazon did not respond to Mint’s queries.

Online payments and e-commerce firm Paytm said the company is not flouting the new pricing norm in any way. It claimed that most of the discounts and cash-backs are funded by sellers on its platforms and only a part of it is offered by Paytm.

“Cash-backs for us are largely a loyalty programme. Every payment system in the country, whether credit cards or banks, offer cash-backs as part of their loyalty programme; we too are a payment company and I see no reason as to why we should be seen in a different light," said Sudhanshu Gupta, Paytm’s vice-president, business.

The entire industry is studying the effectiveness and implementation of the new rules, which took effect on 29 March.

Last week, industry body Internet & Mobile Association of India (IAMAI) circulated an internal paper discussing if the e-commerce marketplaces need to seek extension from the government to comply with the new FDI norms. Mint has seen a copy of the paper. However, according to three people directly associated with the development, this idea was shot down as several IAMAI members failed to reach a consensus around the need for an extension.

“We are actively getting requests from companies to understand how these new regulations will impact them. While discounts have not gone away, some start-ups, especially in the food-ordering and hyper-local space, are making an effort to reduce direct discounting via coupon codes, etc.," said a lawyer at a New Delhi-based law firm on condition of anonymity.

The new regulations would put at risk the rapid growth of online retail—and the high valuations of e-commerce companies—in India. But such firms have already started to try and find new methods of discounts, company executives and legal experts said.

Online retail is expected to increase to $48-60 billion by 2020 from $4.47 billion in 2014. The potential size of India’s online business has attracted an unprecedented rush of cash from venture capital investors, who pumped in more than $9 billion into e-commerce firms over the past two years. Much of this has gone into luring customers through advertising and, more importantly, discounts.

For now, discounting by Internet companies has not stopped, with top e-commerce firms continuing to offer deep discounts and cash-backs on a range of products such as smartphones, laptops, clothes, toys and books.

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