New e-com norms spoil party for big players

Rule targets use of firms related to online marketplaces to sell, or channelise inventory to other sellers

It was bold a step by the government and a huge blow for the big players in India’s e-commerce market. The new rules announced by the Centre last week have indeed spoilt the year-end party for the likes of Flipkart-Walmart and Amazon.

These big players in the e-commerce space are now forced to go into an huddle, and devise a new way out to sustain their business aspirations in India.

More than anybody else, these players will be hit hard as they run their enterprises in India on a marketplace model, which does allow them the luxury of having foreign direct investment (FDI).

The tightening of the e-commerce rules must be seen in the context of alleged misuse of this marketplace model by many an e-commerce firm.

These firms have been said to use a circuitous mechanism to get around the restrictions in a marketplace model. The back-door window is now effectively shut for them.

Essentially, the new rules prohibit any equity relationship between marketplace e-commerce players or their associate firms with vendors.

Should there be any such understanding between them, the vendors will then not be allowed to sell their products through the platform owned by the instant e-commerce company. Also, the new rules explicitly talk about an arm’s length relationship between them.

Should a vendor source over 25% of their inventory from an e-commerce company or firms controlled by it, then it would be disallowed from selling its product on that e-commerce platform.

The rules will have immediate cost implications for Walmart-Flipkart, Amazon and the like, who have built up huge inventory (using their group firms to stock up with vendors who sell on their platforms).

How will they liquidate this in a short-time? This kind of a relationship with vendors is the primary reason for price unfairness in the e-commerce marketplace. It may seem beneficial for end customers. Yet, it has managed to destroy the competitive ecosystem, putting into peril the business ecology in the long-run. It goes beyond the comprehension of a lay person as to how the marketplace firms make money.

Valuation issue

One still is unable to fathom as to how these marketplace companies, who get only a commission for allowing vendors to use their platforms, could elicit such huge attraction from deep-pocketed investors who pump in significant sums of money into these ventures.

The valuation game they play has ensured that these marketplace firms hit the headlines often. With the government stepping in to close the bypass routes, these companies will find the going tough.

There is no denying that the play-field is not level at the moment. The new rules will usher in fairness in the game. What the marketplace model has done is to kill the spirit of enterprise in smaller people who run the traditional mom-and-pop shops.

Also, they have unfairly dented the price models of many a manufacturing firm, especially in the consumer space, through deep discounts for purchases through their portal.

This has already triggered uneasy tension with many consumer goods firms when it comes to servicing products purchased through online marketplaces.

The new rules may be interpreted as negative for attracting FDI.

Further, there could be considerable noise as to how these will hurt job creation in the country. Nevertheless, the fact that very many unreported job losses too have happened with the advent of these marketplace cannot also be wished away. 0To the extent that these rules are intended to set right a wrong, these are welcome.