Firms may find ways to overcome sale cap

The government’s announcement on Tuesday permitting 100 per cent foreign direct investment (FDI) in the marketplace model of e-commerce could set the stage for companies like Flipkart, Snapdeal and Amazon to seek ways of getting around restrictive regulations.

While bringing clarity to the online retail sector, experts say the restrictive nature of the policy which disallows marketplaces from offering discounts to customers and caps sales from a single vendor to a maximum of 25 per cent will only prompt players to find workarounds.

“By creating such complicated plans, the only thing we’re ensuring is that people find a way to work around them. What’s the point of allowing 100 per cent FDI and creating so many clauses that not a single player will be interested in following them?” said Debabrat Mishra, director at Hay Group.

The new policy will inconvenience Amazon India and Flipkart, both of whom have their own captive sellers, Cloudtail and WS Retail, which allow them to function as hybrid inventory models.

While the new policy restricts the way these in-house sellers function, these companies could just spin off multiple such sellers through holding companies, said one Internet and e-commerce expert who did not want to be named.

GD Thomas Phillippe, partner, Khaitan & Co, pointed out that the companies could explore several ways to surpass the clause of no single vendor selling more than 25 per cent of the total on any e-commerce marketplace platform. He did not elaborate.

Other experts claimed online marketplaces might just divide their stakes in different shell companies to skirt the guideline. “The stake they have in the main seller companies can be divided into new entities which will help them to continue as they are,” said a senior executive from an e-commerce company.

In 2014-15, Snapdeal, Amazon and Flipkart posted combined losses of close to Rs 7,000 crore, a majority of which was due to high marketing costs and undercutting product costs.

The government could not take a protectionist stand by creating restrictions for e-commerce companies in order to safeguard offline retail, said Mishra of Hay group. “The government should ideally open up FDI for all forms of retail, online and offline, to create a level playing field. There’s a flawed thinking that investment alone creates an advantage,” he adds.

While there were plans to bring in 51 per cent FDI in multi-brand offline retail in the past, the government has gone back on its proposal in the name of safeguarding smaller offline businesses. These large offline retailers are now pressing the government to curb online retail.

Apart from restricting discounts, a move that could hurt customers is the shifting the responsibility for sales and service from marketplaces to sellers. Flipkart, Snapdeal and Amazon offer a great buying experience, now they could push the responsibility on to the seller in certain cases.
(With inputs from Karan Choudhury in New Delhi)

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