What 100-pc FDI in marketplace model spells for e-commerce companies as well as their customers

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The government recently permitted 100 percent foreign direct investment (FDI) in the marketplace format of e-commerce retailing, with a view to attract more foreign investments.

According to the press note issued by the Department of Industrial Policy and Promotion (DIPP) on FDI in e-commerce, FDI has not been allowed in inventory-based model of e-commerce.

Global e-commerce giants like Amazon and eBay are operating online marketplaces in India, while Indian players like Flipkart and Snapdeal have foreign investments even as there were no clear FDI guidelines on various online retail models.

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As there was ambiguity in the definition of a marketplace model, these firms were working around this loophole.

Now that marketplace model has been defined, it would be interesting to note whether this new policy will benefit existing e-commerce players like Flipkart, Amazon, Snapdeal.

DIPP has also come out with the definition of ‘e-commerce’, ‘inventory-based model’ and ‘marketplace model’.

Marketplace model of e-commerce as defined by DIPP means providing of an IT platform by an e-commerce entity on a digital and electronic network, to act as a facilitator between buyer and seller.

The inventory-based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to consumers directly, according to the guidelines.

A marketplace entity will be permitted to enter into transactions with sellers registered on its platform on business-to-business basis, DIPP said.

DIPP further clarified that an e-commerce firm will not be permitted to sell more than 25 percent of the sales affected through its marketplace from one vendor or their group companies.

“In order to provide clarity to the extant policy, guidelines for FDI on e-commerce sector have been formulated,” DIPP informed.

Prior to this announcement, 100-percent FDI was already allowed in business-to-business (B2B) e-commerce.

We have summarised below the broad impact this press note might have on the existing e-commerce players and also on the ecosystem at large:

  1. The deep discount era might become history, since the government is insisting that e-commerce companies only act as a platform to facilitate their listed vendors to sell, instead of underwriting minimum sales prices and offering discounts, and absorbing the resulting loss themselves.

This could be a boon in disguise as these e-commerce players would now be forced to push only such discounts that are absorbed by their vendor partners, which in turn may bring in profitability and investor confidence in these players.

On the negative side. since there is a strong possibility that online prices will now revert to levels that are comparable with offline prices, this could make online marketplaces less attractive to shoppers and investors.

  1. E-commerce valuation might shrink in short term - That is primarily due to the fact that these companies will no longer be able to show huge growth in revenues. Already, last month Morgan Stanley marked down the value of its investment in Flipkart by 27 percent.

However, on the positive side, in the medium to long term, the profitability will recover as heavy discounts end, and that should improve investor perception about these companies, and subsequently valuations.

  1. Existing e-commerce players have to re-structure - DIPP further clarified that an e-commerce firm will not be permitted to sell more than 25 percent of the sales affected through its marketplace from one vendor or their group companies. Thus, companies like Flipkart and Amazon that drive majority of their sales from their related firms would face a challenge.

Even though Flipkart had separated the legal ownership of its logistic arm, WS Retail, it continues to drive its sales through it. On the other hand, Amazon works through a JV of Catamaran ventures for its logistic needs.

Also, these e-commerce companies will not be able to give any warranty on the products sold, thus they would also have to rework the mode of operation to that part too.

The high point of this press note is complete clarity on the role that a marketplace would play. Tthus, support service rendered by these e-commerce companies will give greater thrust to the investment and growth climate of such companies.

Additionally, since this press note is applicable to all the marketplaces, it would have impact on not only the above stated e-commerce companies, but also service marketplaces such as Uber, Ola and others. They also have to face the challenge while offering discounts and other means for acquiring new customers.

  1. Level playing field for offline and also for not-so-heavily-funded e-commerce companies, since this press note restricts the role of a marketplace player. E-commerce companies have actually become retailers themselves by working around the ambiguities of the policy, offering deep discounts, which created lot of disparity.

To conclude – E-commerce companies will be forced to restructure their model of operation in order to raise funds at their current valuations. Also, since FDI is not permitted in inventory-based model, rustling up higher rounds of funding would prove to be a difficult task.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)