Why India’s E-Commerce Curbs Will Hinder Foreign Investment
India has introduced new curbs for e-commerce companies that are backed by foreign investments. The new rules, which kick in on Feb. 1, range from banning e-commerce vendors from selling products through affiliated companies to restrictions on pricing and discounts that they can offer. Although the policy is intended to ensure the market remains a level playing field across the industry, they will have a significant impact on global giants Amazon and Walmart-owned Flipkart, experts say.
Flipkart has apparently informed the government that it faces the risk of “significant customer disruption” if the implementation of new curbs is not delayed by six months, according to a Reuters report. Amazon had also reportedly sought a similar extension to the deadline.
The industry bodies of small traders–who are among the voter base for the Narendra Modi-led ruling Bharatiya Janata Party–have been demanding changes like these for years, and with national elections around the corner, the government has finally obliged.
Kartik Maheshwari, a technology lawyer at Nishith Desai Associates, laid out the changes and implications for consumers and foreign investment in a recent interview. Edited excerpts follow.
BAHREE: How has the government changed e-commerce regulations?
MAHESHWARI: The Indian government has revised its existing policy governing foreign investments in e-commerce marketplaces by issuing Press Note 2 of 2018 (“Revised Policy”) which imposes additional conditions on e-commerce entities with foreign investment.
These are the specific changes under the revised policy:
- Restriction on certain vendors selling on marketplaces: Whilst e-commerce companies were always restricted from owning the inventory that was sold on their platforms, the revised policy also prohibits them from allowing sellers in which they (or any group companies) may have a stake or any control and caps sales from any single vendor at 25%.
- Services and cash backs: In addition to the current restriction on e-commerce platforms on influencing the sale price of goods or services, the revised policy says any services provided to its vendors must be at an arm’s length and in a fair and non-discriminatory manner and services provided to one vendor that aren’t offered to others will be deemed to be discriminatory. Similarly, it says that a cash back provided by a marketplace to its buyers must be fair and non-discriminatory. In the policy, use of terms like “non-discriminatory” is vague and that leaves it open to arbitrariness in its implementation. Further, given that the government has claimed that the intent of the policy was to protect consumer interests, there is no rationale to implement / enforce such changes only against entities that have foreign investment in them and technically should apply to all entities engaged in e-commerce regardless of their ownership structure.
- Exclusive arrangements: In the past several smartphone brands, for instance, have had tie-ups with one e-commerce firm or another to exclusively sell their product on that platform. The revised policy puts an end to such exclusive arrangements. Given that such arrangements do not appear to have a direct negative impact on the consumer, the rationale for this is not clear.
- Compliances: The government has also mandated that e-commerce entities to provide a certificate along with a report of a statutory auditor to India’s central bank, confirming compliance with the conditions, by September 30 every year for the preceding financial year.
Are these just proposed changes or will they be implemented? How soon will they take effect?
These changes have already been issued as an amendment to the existing FDI policy and are currently scheduled to come into force from February 1, 2019.
What’s the significance of the revised policy? Who does it help or hurt and how?
The amendments to the policy are significant since Indian companies have seen billions of dollars of foreign investments being routed to India on the back of existing polices. We had one of the largest exits for promoters and investors in terms of Walmart’s acquisition of a majority stake in Flipkart which I’m sure was at least in some part based on continuity of policy. Therefore, any change in this policy will have a significant impact on business as is carried out today. In terms of direct impact, whilst the policy appears to have been enacted to help small businesses/traders, it may end up helping domestic companies who are engaged in e-commerce (since these changes have only been incorporated in the foreign investment policy) and in turn may hurt consumers (at least in the short run), and foreign investment into India.
According to news reports, the revised policy will hurt Amazon’s and Walmart-owned Flipkart’s investment plans for India. How so?
Investments by most foreign companies are hinged upon continuity and stability of government policy. Given that the government has not only permitted but also encouraged foreign investments into India, this sudden change in the policy is likely to throw a spanner into the expansion plans of all foreign platforms and, in turn, investments flowing into India.
Were these policy changes expected or were they sudden? What is the message that the Indian government is sending to foreign investors?
The policy changes seemed to have caught most people by surprise especially since there was no real public consultation by the government regarding the revised policy. Coupled with the fact that it was issued in the last week of December with a month for implementation, I don’t think anyone can realistically implement such significant changes in such a short period, let alone prepare for it.
In terms of message for foreign investors, whilst the government has issued a clarification specifying that the revised policy is only aimed at plugging implementation issues in the existing policy, the unintentional message though, appears to be that the government is willing to undo some of its excellent work in the past in favor of what news reports are now suggesting are certain sections of domestic companies/traders. Whilst I’m not privy to specific plans by the companies, news reports are already suggesting that these changes might cost India to the tune of $46 billion in the coming years, which, if true, will impact M&A activity as well as hiring by these companies.