E-commerce firms may find craftier ways to overcome FDI marketplace restrictions

The government’s announcement on Tuesday to allow 100% foreign direct investment (FDI) in the marketplace model of e-commerce could set the stage for companies such as Flipkart, Snapdeal and Amazon to find craftier ways of getting around restrictive regulations.

While serving as a bringer-of-clarity to the online retail sector in India, experts say that the restrictive nature of the policy which disallows marketplaces from offering discounts to customers and caps sales from a single sellers to a maximum of 25% will only prompt players to find workarounds.

“By creating such complicated plans, the only thing we’re ensuring is that people find a way to work around them. What’s the point of allowing 100% FDI and creating so many clauses that not a single player will be interested in following it?” said Debabrat Mishra, director at Hay Group.

The new policy will create trouble for Amazon India and Flipkart, both of whom have their own captive sellers – Cloudtail and WS Retail which allow them to function as hybrid inventory models. While the new policy restricts the way these in-house sellers function, these companies could just spin off multiple such sellers through holding companies, said one internet and e-commerce expert that did not want to be named.

Even the restrictions on discounts offered by e-commerce marketplaces, which is aimed at preserving the interests of offline sellers in the country, can be easily bypassed. E-commerce companies don’t admit it, but the billions of dollars that have flowed into the sector over the past few years have funded discounts for customers.

In the fiscal year 2014-15, Snapdeal, Amazon and Flipkart posted combined losses of close to Rs 7,000 crore, a majority of which was due to high marketing costs and undercutting product costs for customers.

The government can’t take a protectionist stand by creating restrictions for e-commerce companies in order to safeguard offline retail, said Mishra. “The government should ideally open up FDI into all forms of retail, online and offline, to create a level playing field. There’s a flawed thinking that investment alone creates an advantage,” he adds.

While there were plans to bring in 51% FDI in multi-brand offline retail in the past, the government has gone back on its proposal in the name of safeguarding smaller offline businesses. These large offline retailers are now pressing the government to curb online retail in the fear of losing business.

Apart from restricting discounts, a move which could hurt customers is the passing of the buck for sales and service from marketplaces to sellers themselves. So far companies such as Flipkart, Snapdeal and Amazon have built good repo with the customers by offering a great buying experience. While the ruling might not stop them from continuing this in the future, it could lead to discrimination where they push responsibility onto the seller in certain cases.