Unveiling DIPP’s New Rules
The rules essentially govern the operations of vendors that have any equity stake in an e-commerce firm. According to the new regulations, such vendors are prohibited from selling their products on the platform owned by the e-commerce firm in which they hold a stake. A vendor will be deemed controlled by an e-commerce firm if it purchases 25% or more of its inventory from the latter’s group company, and hence will be barred from selling on the firm’s portal. The policy also mandates that no seller can exclusively sell products on any one marketplace platform. Furthermore, all vendors should be offered services like logistics, warehousing, advertising, payments, and financing in a “fair and non-discriminatory manner”.
The Motivation Behind the Change
Large e-commerce companies such as Amazon and Flipkart provide a platform for their group companies, even though they do not hold any inventory themselves. This mode of operation is seen as potentially distorting competition since these vendors enjoy special incentives over others. The companies operate under the marketplace model rather than the inventory model due to foreign investment restrictions, enabling them to offer products at prices significantly lower than independent sellers. Thus, the move was instigated as an effort to level the playing field.
The Influence of DIPP Norms
The policy is designed to protect small vendors on e-commerce websites. It aims to ensure that vendors, in which e-commerce firms have no stake, are not discriminated against. The policy can also potentially enable smaller marketplaces with no stake in vendors to compete with the larger firms. Additionally, it will align with the Government’s Start-Up India initiative, promoting a more competitive and diversified digital marketplace.
e-Commerce in India
E-commerce is a business model that leverages an electronic network (typically the internet) to facilitate commercial transactions. In India, it takes three forms – the Inventory based model, the Marketplace based model, and a Hybrid model combining both. The Marketplace model requires the e-commerce firm to act as a facilitator between buyers and sellers without influencing sale price or showing bias to any vendor. On the other hand, the inventory model involves the e-commerce entity owning and selling the goods and services directly to consumers.
| Business Model | Description |
|---|---|
| Inventory based model | An e-commerce activity where the inventory of goods and services is owned by e-commerce entity and sold to the consumers directly. |
| Marketplace based model | Providing an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller. |
| Hybrid model | A mix of Inventory based and Marketplace model. |
FDI Guidelines for e-Commerce
The DIPP has laid out specific guidelines regarding FDI in e-commerce. They state that 100% FDI is allowed in B2B e-commerce, but it is strictly prohibited in B2C e-commerce. However, the marketplace model permits 100% FDI through an automatic route, whereas the inventory model does not allow any FDI.