Government of India on 26th December, 2018 notified the changes in e-commerce FDI Policy targeting deep discounts, various complex structures of group entities, warehousing agreements and other services agreements adopted by the market place entities to source goods in bulk from the manufacturers at cheap rates or exercise control over the inventory directly or indirectly and selling them on the online platforms in names of small vendors on the online trading platforms. The circular is proposed to come into effect from 01st February, 2019. The key changes brought by the new circular are as under:

Control over inventory in addition to ownership:

Prior to the existing notification, if an e-commerce market place exercised ownership over the inventory the same was deemed to be an inventory based model and no FDI was permitted therein.

Under the new regime, however, in addition to ownership if the e-commerce platform exercises control over the inventory, the same is deemed to be an inventory based model and no FDI is permitted. Therefore, if more than 25% of the vendor’s inventory is purchased from marketplace entity or its group entities then such market place entity will be deemed to have control over the inventory sold by such a vendor will not be allowed to sell on the market place entity platform. The change is likely to discourage the market place entities from using the complex structures of various group entities for selling goods on a B2B basis to various small vendors at discounted rates who in-turn list the goods on the market place entity platform for onward B2C sales.

Direct or Indirect Influencing of Sale Price:

Marketplace entity has been barred from giving directly or indirectly give discounts, cash back, warehousing, logistics, advertising, and other services to vendors on a preferential basis. Services provided by the marketplace entity (directly or indirectly) to the vendors on the e-commerce platform shall be at arm’s length and on a fair basis.

Equity Participation:

As per the new proposal, a vendor will not be allowed to sell on a marketplace entity’s platform if such marketplace entity or its group companies hold any stake or have equity participation in the vendor. In such a scenario, players like Amazon etc. may be barred from selling products from entities like Cloudtail and Appario where it has equity investments.

Exclusive selling contracts:

A marketplace entity shall not mandateany vendor to sell any product exclusively on such marketplace entity’s platform. Therefore, various sellers which have exclusive arrangements with the marketplace entities may be seriously affected. For example, Oneplus sells its smartphones only through Amazon. Once the above proposal is made effective, such arrangements may not be possible.

Compliance Certificate:

Marketplace entities are required to provide a certificate, along with a report of a statutory auditor, to the Reserve Bank of India, confirming compliance with the statutory guidelines by 30th of September every year, for the preceding financial year.

The the proposed move is expected to have very far reaching implication on the working of marketplace entities and might delay or even derail their investment plans etc. The e-commerce entities have requested to the Indian Government to extend the prescribed timeline of 01st February 2019, though, the final decision by the Indian Government is awaited.

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