E-commerce rules tightened: Is the discount party over for customers, marketplaces? Not yet, say experts

The government has come down heavily on online market places banning them from selling products of the companies in which they have equity stakes or management control as well as getting into an agreement for exclusive deals. "An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity," the ministry said.

What does this tightening of rules mean for e-commerce marketplaces, for consumers and how much will it benefit small and medium players of the trade who have been crying hoarse for a long time on the lack of a level playing ground in retail?

The e-commerce marketplaces like Amazon and Flipkart among others offer deep discounts which works well for both--the consumers and the marketplaces. Will the tightening of reforms in the sector mean the death knell of discounts? Experts were divided on the issue. While some felt that deep discounts would continue, some said that it might take a hit.

Discounts offered

Discounts are offered by both online and offline players but it is the increasing regularity at which the former offers these discounts that is upsetting the latter. This move from the government may put an end to the discounts and if not, at least restrict them.

 E-commerce rules tightened: Is the discount party over for customers, marketplaces? Not yet, say experts

Representational image. Thinkstock

The main issue with e-commerce marketplace is the discounts offered by online marketplaces. The Confederation of All India Traders (CAIT) called the discounts 'predatory pricing' which upsets market dynamics. It claimed e-commerce marketplaces' indulged in "deep discounting and loss funding thereby violating FDI Policy 2016 of the Union government. These e-commerce companies claim to be a marketplace but mass scale public advertisements by them in the recent past is nothing but to solicit the consumers directly," the body had asked.

Traders' bodies have been incessant in their displeasure of the deep discounts offered by e-commerce marketplaces. Even online players have registered their protest like the All India Online Vendors Association (AIOVA), a grouping of over 2,000 sellers on various e-commerce market places, for instance. "Few e-commerce marketplaces were giving preferential treatment and discounts to selected, controlled vendors on the platform," a spokesperson for the association said.

Welcoming the move of the government to offer a level playing field to domestic players, Praveen Khandelwal, secretary general, CAIT, said in the wake of foul play of global players in adopting all kinds of tactics to control and dominate retail trade through e-commerce, government's clarifications will prove to be an embargo on such practices." The rule comes into play from 1 February 2019.

However, shouldn't the Competition Commission of India be raising the issue instead of the government, asked experts. But recently CCI in its ruling on a complaint filed by the AIVOA said that business practices of Flipkart and Amazon are not in violation of competition norms and rejected allegations of abuse of market dominance. Further, CCI also made it clear that any intervention in the evolving e-commerce marketplace needs to be 'carefully crafted' to ensure that innovations are not stifled.

Arvind Singhal of Teknopak Advisors called this move of the government 'anti competitive', and said the government should not be concerned with companies offering discounts or the lack of it. "Aren't there discount sale happening offline too? What is the meaning of deep discounting? I hope sooner or later someone files a complaint to understand what exactly does this mean," he said.

He said that the marketplace will find other ways to offer discounts as the entire chain was being maintained by the constant demand by consumers and supply provided by the marketplace. "I don't see any dip in deep discounts," he said.

The government allows 100 percent FDI for those online stores that follow the marketplace model with zero inventory and provides up to 49 percent FDI for inventory-based e-commerce where the latter also sells its products. However, the distinction became increasingly blurred in India with Amazon selling through its subsidiaries like Cloudtail and Appario and Flipkart through RetailNet and Omnitech Retail which goes against the government policy. So there should not be a room for complaint for e-commerce players when looked at it from the legal perspective. "The e-commerce players should have expected this and prepared for it. You were not allowed to have inventory-based model," said Paula Mariwala, Executive Director at Seedfund, early-stage venture capital fund.

Looked at from the offline vendor's perspective, even household items are available cheaper on online marketplaces making it difficult for the vendor to survive in this increasingly competitive space. However, this practice of offering products at deep discounts is not a new phenomenon.

But taking away discounts from the big players do not really help the small traders. Small traders do not have the bandwidth to sell across the country and e-commerce marketplaces helped them to do that. There is no big player in India like Amazon or Wal-mart who can provide space to small traders. "No homegrown player has the technological know-how or the financial capability to be able to beat the giants," said an analyst.

The move by the government will also significantly impact the government's image abroad. The Narendra Modi government has eased rules to bring in more FDI.  But after this move by the government in e-commerce, investors would be wary.

"The future of companies who have entered India through the FDI route is at stake. After the shock of demonetisation, the hiccups in GST, consumers have started spending in 2018. But with this announcement for e-commerce, the government has put up the a roadblock in the growth of retail in 2019. This move by the government has less to do with policy and more to do with politics," said Satish Meena, a senior research analyst at Forrester Research.

E-commerce has transformed the way business is done in India with the market expected to grow to $200 billion by 2026 from $38.5 billion as of 2017, according to Indian Brand Equity Foundation. The industry has grown exponentially on account of increasing internet and smartphone penetration. However, the rapid growth may be restricted by the government's latest announcement.

But some analysts were of the opinion that it is too early to sound the death knell on discounts. "What do you expect vendors to do with unsold stocks? Online marketplaces will find other ways to get customers. Discounts will continue," they said. "Investors will make sure growth will happen through other means.  It is going to be interesting to watch," experts said.

Updated Date: Dec 27, 2018 18:19:53 IST