e-Commerce Industry has seen unprecedented growth in recent years paving the way for increased FDI. However, with growing trends of market imperfection, govt. has notified tighter rules governing e-commerce platforms. Mention the effective changes brought and analyze their implications on e-commerce business. (200 W/ 12½ M)




Model Answer:

New guidelines for e-commerce

  1. Tighter rules governing e-commerce platforms were notified by the government
  2. They are designed to level the playing field for all vendors in an online marketplace
  3. These impose restrictions on related-party transactions, preferential treatment to suppliers, and inventory dumping
  4. All of these were market imperfections that had crept in since the government had announced the foreign direct investment (FDI) policy for the sector in 2016, during which US retail giants Amazon and Walmart came to occupy a commanding position in India’s $41-billion e-commerce industry

Reasons behind new rules

  1. In March 2016, foreign investment up to 100% was allowed under the automatic route for e-com firms engaged in business-to-business transactions using the marketplace model — one where a firm sets up an enabling IT platform to facilitate trade between sellers and buyers
  2. However, FDI was not allowed where the e-com player owned the inventory of goods to be sold, or for business-to-consumer purposes, barring a few exceptions
  3. Indian brick-and-mortar retailers have grown restive, claiming online marketplaces like Amazon and Flipkart have acquired the power to influence retail prices, in contravention of the policy that restricts FDI in business-to-consumer (B2C) e-commerce, but not in business-to-business (B2B)
  4. The government appears to have bought this argument

Changed rules

  1. Earlier a single vendor or its group firms couldn’t account for over 25% of sales in a marketplace; now the rules bar sales by any entities where the e-com firm has an equity stake
  2. A vendor’s inventory will be deemed to be controlled by the e-com player if more than 25% of its purchases are from the latter or related firms
  3. Separately, any specialised back-end support for some sellers must now be extended to all vendors, while discounts, cash-backs and preferential subscription services have been made far trickier to implement
  4. An e-commerce marketplace entity will not mandate any seller to offer a product exclusively on its platform under the new rules
  5. The companies will now have to furnish reports to the Reserve Bank of India annually, adding another dimension to compliance and monitoring of the e-commerce industry

Implications of the new rules

  1. The Centre’s curiously timed attempt to ‘clarify’ foreign direct investment norms for e-commerce players could end up scuttling investor interest in the sector that has attracted large foreign players and generated thousands of jobs
  2. The fresh restrictions and the clarifications on certain operational aspects could reinforce investor complaints about India being unpredictable in terms of policies

Way forward

  1. Globally, India has been taking on protectionism has been emphasizing that free trade is essential so consumers get the best deal everywhere
  2. The same consumer focus and non-protectionist tenets must be applied for internal trade.