The government recently released new changes to the FDI policy governing the e-commerce sector. These guidelines which strike down at predatory pricing and deep discounts aim to provide a level-playing field for all can prove to be a game changer for the sector.
I. High Level: The Ministry of Commerce and Industry recently released new changes to the FDI policy for the e-commerce sector which aim to cut predatory pricing and deep discounting by retail giants, thereby bringing about a "level-playing field" for the smaller and multi-channel players, as well as the brick and mortar retailers.
II. Differentiation: The guidelines differentiate between a Marketplace based model of e-commerce and an Inventory based model of e-commerce, allowing 100% foreign direct investment through automatic route in the former, but no such capital injection in the latter.
III. Why?: Experts opine that it was the heavy discounts, primarily funded by FDI which made it difficult for smaller players and offline retailers to compete against the big players. The new guidelines would ensure fair play for all.
IV. Current Scenario: Till now big the retail giants such as Amazon and Flipkart were bypassing the Marketplace model by creating legal entities which first buy from vendors (i.e in a way keep inventory).
VI. Cause & Effect:
VII. Loopholes: The new FDI rules state that an online marketplace cannot sell products from a vendor in which they have a stake. However, they do not say anything about selling goods from a subsidiary firm of a vendor. For example, Cloudtail is a joint venture between Amazon.com and Narayan Murthy’s family office Catamaran Ventures, which forms a majority of Amazon's sales.
VIII. The Watchdog: The government is also considering the appointment of a dedicated e-commerce regulator.
If implemented with due diligence, the new rules can provide the much-needed fillip to small players and brick-and-mortar retailers who have suffered massive losses on back of the colossal discounts and cashbacks offered by the retail giants over the years.
IX. Next steps: The FDI rules are expected to come into force by February 1st, 2019. A new comprehensive draft policy for e-commerce sector as a whole is expected to be released in a few weeks.
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