The Impact of New E-Commerce Rules on  Industry Main Players

New e-commerce rules have restricted big influencers from selling products from companies in which they have a stake, and capping the percentage of the amount of products that a vendor can sell through a marketplace entity (the IT platform of an e-commerce entity) or its group companies.

To curb the practice of these deep discounts, the new regulation restricts any changes in the price of goods and services by the platforms, and also brings in a new set of rules which bars the sale of products exclusively in one marketplace.

From February 1, 2019, e-commerce companies running marketplace platforms — such as Amazon and Flipkart — cannot sell products through companies, and from companies, in which they hold an equity stake.

While foreign direct investment is not permitted in the inventory-based model of e-commerce, the clarification places a cap of 25% on the inventory that a marketplace entity or its group companies can buy from a vendor. “Inventory of a vendor will be deemed to be controlled by an e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies,” the statement said.

Industry experts say the changes will have a significant impact on the business model of the e-commerce major players, as most of them source goods from sellers who are related party entities. “Going forward, the suppliers will not be permitted to sell their products on the platform run by such a marketplace entity. This will impact back-end operations, as Group entities would have to be removed from the e-commerce value chain. The time has now come to look at franchise channels, rather than equity investments channels, to do business in India,” Rajiv Chugh, National Leader, Policy Advisory & Speciality Services, EY India, said.

E-commerce players like Amazon and Flipkart, who have their own private labels, will also not be able to sell them on their platforms if they hold equity in the company manufacturing them.

However, some experts feel that a degree of leeway may still be available to such companies. “These clarifications will have a major impact on the major e-commerce players since most of them primarily source goods from sellers who are primarily relevant to such e-commerce players.

However, as the language of the clarification seems to grant leeway, to a certain extent, to entities which are step-down subsidiaries of the entity in which the e-commerce entity or its group companies hold equity. Nonetheless, these clarifications will definitely have major repercussions on the business model of such e-commerce players,” Atul Pandey, partner at Khaitan & Co, said.

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