The day after Christmas, the government issued a press note clarifying its stance on foreign direct investment (FDI) norms for e-commerce marketplaces, in a bid to mollify trade associations that were protesting against the deep discounting by e-commerce companies and the lack of a level playing field for small traders. This clarification introduced the concept of disruptive norms, without any stakeholder consultation, and acts as a diktat to e-commerce marketplaces to be purely technology platforms providing some additional services such as warehousing, logistics, order fulfilment, thereby restricting their roles severely.
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In addition to the existing restriction on inventory ownership, e-commerce firms will not be allowed to exercise control over inventory now. A company is deemed to exercise control over inventory of a vendor if more than 25% of purchases of the vendor are from the e-tailer or its group entities. Under the FDI rules, a “group company” is defined as an enterprise which, directly or indirectly, are able to exercise 26% or more voting rights, or appoint more than 50% of directors on the board of another company.
Marketplaces, through their wholesale arms, were purchasing products in bulk directly from OEMs at significant discounts. They were, in turn, selling these products at a discount to several vendors, who were then retailing it on the marketplace. This was allowed, as 100% FDI under the automatic route was permitted in B2B e-commerce. However, with the new restrictions, e-tailers will be significantly restricted from acting as wholesalers to the vendors who are selling on the platform.
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Vaibhav Kakkar is a partner at L&L Partners and Keshav Pareek is an associate. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.
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