The e-commerce sector in India was a hotbed of activity in 2018 — from the jaw-dropping deal of Walmart acquiring Flipkart for $16 billion to BigBasket raising $300 million from Alibaba and Amazon pumping additional $2 billion in investments in India. It was the year when private labels and in-house inventories grew substantially, and discounts continued to lure more shoppers to the online channels.
The cheer, however, has been short-lived. On December 26, 2018, the Department of Industrial Policy & Promotion (DIPP) introduced certain changes and clarifications to the 2017 policy governing Foreign Direct Investment (FDI) in the e-commerce. (100% FDI is allowed in marketplace model whereas no FDI is allowed in inventory-based model). The policy, that is set to come into effect from February 1, 2019, has the potential to completely change the dynamics of the e-commerce landscape in India.
“Companies that run part market place models, businesses that promote private labels over 3rd party brands and use a network of their own services for fulfillment stand to be impacted with the implementation of this policy,” says Ashish Fafadia, partner, Blume Ventures, a seed-stage venture fund that has invested in start-ups such as Purplle, Milkbasket and RailYatri.
To put things in context, let us understand what the policy states. Firstly, an e-commerce entity cannot exercise ‘ownership’ and ‘control’ over inventory, i.e. more than 25% of the vendor purchases cannot be from e-commerce entity or group companies. This amendment intends to curb scenarios where e-commerce or their group entities primarily sell goods to vendors, who ultimately sell to consumers on the platform of such e-commerce entity, states Ankur Pahwa, partner and national leader – e-commerce and consumer internet, EY India.
Secondly, a vendor will not be allowed to sell on an e-commerce platform if the platform has ‘equity participation’ in the vendor. Experts believe that such restriction may impact online vendors (with equity participation from e-commerce entity or group companies) which are engaged in manufacturing or single brand retailing, if they intend to sell