Photo: Bloomberg
Photo: Bloomberg

Opinion | The government has tightened the rules, but some loose ends still remain

All participants including the foreign investors need clear blue water to navigate

Soon after Christmas, on 26 December, the government notified new rules and clarifications for the e-commerce marketplace model under the foreign direct investment (FDI) policy. The new rules will come into play on 1 February. Undoubtedly, the new rules will have substantial impact on the existing business models, which have evolved in the e-commerce marketplace model so far. 

 Broadly, the new rules are related to three buckets: (a) no inventory model; (b) fair and non-discriminatory policies to promote healthy competition; and (c) regulatory compliance mechanism. 

The old rule that the marketplace cannot have more than 25% of the sales value generated through a single vendor is abolished. As regards the inventory model, the FDI policy is clear that the e-commerce marketplace (B2B) with foreign equity cannot be structured as inventory model, else it will open up an elephantine backdoor entry into the B2C market for foreign players. To wall up this base rule, the new rules bars the marketplace or its group entity from having any: (a) ‘equity participation’ in the vendor; (b) ‘ownership’ or ‘control’ over the vendor’s inventory; (c) exclusive tie up with the vendor. In this context, the marketplace shall be deemed to have control over the vendor, if the vendor buys more than 25% of its inventory from the marketplace or its group entity. 

Clearly, each of the new rules has loose ends; for example: (a) no ‘equity participation’ in the vendor doesn’t ban any group company of the vendor to sell on the marketplace, as there is no express exclusion of any indirect ‘equity participation’; (b) no clear definition of ‘control’ over the vendor’s inventory to clarify that warehousing, logistics, and other services cannot be construed as ‘control’ over inventory; and (c) no exclusivity with any vendor can softly be beaten up if the vendor voluntarily sells all of its inventory on a single marketplace or the vendor also sells small quantities on offline or on their own website. Arguably, there maybe more such loose ends, which provide legitimate framework for an optimum business model for an e-commerce marketplace. 

Though, the new rules seek to oust related party transactions between the marketplace and the vendors, which could create distortion or imperfections in the marketplace; however, it may adversely impact development of a robust ecosystem for the marketplace by discouraging even minority investment by the marketplace into any vendor or its group company; for example, minority investment in the businesses carrying on single brand retail trading, food retail and manufacturing, which are legitimate models under the FDI policy. 

To promote competition—the new rules require the marketplace or its group entity equal opportunity and level-laying field to all vendors by providing its services (order fulfilment, call centre, warehousing, marketing, payments, financing etc.) to all vendors on fair and non-discriminatory basis.

However, if the marketplace doesn’t offer its services on the same terms and conditions to any vendor, as available to other vendors ‘in similar circumstances’, then such terms shall be deemed to be unfair and discriminatory. No guidance is offered as to what constitutes ‘similar circumstances’. So, there is no clarity as to what kind of flexibility the marketplace is allowed to offer to any vendor. 

It is expected that these rules will promote competition and provide equal opportunity for smaller vendors and MSMEs in the marketplace and clamping down on cashback or discount will prevent any predatory practice. Also, the marketplace or its group entity will provide cashback to buyers on fair and non-discriminatory basis. Interestingly, cashback is not considered as directly or indirectly influencing the price of goods or services. 

On the regulatory compliance side, the marketplace is required to submit its statutory auditor’s compliance certificate to the Reserve Bank of India by 30 September every year for the preceding financial year. It is not clear how the marketplace or its statutory auditor will have access to the books and data of each vendor to comply with the new rules. Also, given the new rules go live on 1 February 2019, it would be difficult to comply with the them for FY2018-19 if the marketplace entity has followed the old rules. 

This holidays season isn’t over as yet. The e-commerce players will have a lot of home work to do before 1 February. In all fairness, the government should suitably extend the deadline, as all players will need more clarifications and time to re-organize their business model. 

The government needs to protect the B2C market, but all market participants, including the foreign investors, need clear blue water to navigate the regulations. Any fuzziness will only exacerbate the regulatory risk for foreign investors, who have reposed tremendous confidence in the Indian market by investing billions of dollars and, as a result, if this sector does not attract capital, it will certainly stifle competition.

In the end, consumers will be the worst sufferers. All in all, the loose ends of the new rules must not muddy up the water again!

Nishant Singh is partner at law firm IndusLaw.

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