New FDI policy on e-commerce: Key factors Amazon, Flipkart, others must consider in future strategy

New FDI policy on e-commerce: Key factors Amazon, Flipkart, others must consider in future strategy

The renewed FDI Policy sets out certain limitations with the intent of providing a level playing field to vendors of an e-commerce marketplace platform.

The Department for Promotion of Industry and Internal Trade's (erstwhile Department of Industrial Policy & Promotion) (DPIIT) Press Note of 26 December 2018, renewing Foreign Direct Investment conditions for e-commerce marketplace platforms (renewed FDI Policy) led to a turbulent new year for FDI backed e-commerce platforms. With DPIIT having refused extension beyond 1 February 2019 for the renewed FDI Policy to come into effect, there is chaos among e-commerce companies. Big e-tailers have gone back to the drawing board to analyse their business models to make them compliant with the renewed FDI Policy.

The renewed FDI Policy sets out certain limitations with the intent of providing a level playing field to vendors of an e-commerce marketplace platform. This appears to be a move to redress complaints of vendors against FDI backed e-commerce entities favouring vendors linked to them.

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Under the renewed FDI Policy, with effect from 1 February 2019, e-commerce platforms cannot inter alia: (i) provide services to any vendor on terms not available to other vendors in similar circumstances; (ii) mandate an exclusivity contract with a vendor; and (iii) host products of vendors in which they or their group companies have equity participation. Such controls strike at the foundation of the business model of such entities. Promotion of certain vendors' products and luring customers with 'deep discounts' has been done away with. Business models are now being rejigged at huge costs to comply with the renewed FDI Policy.

Specifically, product promotion strategy of e-commerce platforms may require a shuffle. Products of vendors which are linked to the parent company cannot be sold on the platform. Additionally, exclusive arrangements that existed for products, such as mobile phones, may no longer be permitted. Companies will have to come up with different marketing strategies to appeal to the Indian consumers.

E-commerce marketplace platforms continue to be permitted to provide support services, including marketing and advertising, to vendors. However, such services can only be provided at arm's length price and in a fair, non-discriminatory manner. Additionally, any change in the marketing strategy must not make the business unviable.

Some factors that e-commerce companies must consider while revisiting their marketing and promotion strategy are discussed below.

Identifying dissimilar circumstances for vendors

Vendors in similar circumstances cannot be discriminated. This puts the onus on the platform to ensure that no vendor in 'similar circumstances' is being preferred over another. Legal precedents have over time expounded on the concept of equality for equals. The language used in the renewed FDI Policy appears to foster the same message. Ergo, terms for vendors in dissimilar circumstances or in different classes can be different and the same shall not be considered discriminatory. Of course, such classification must be reasonable.

One such way to achieve dissimilar circumstances would be to introduce additional promotion for an extra fee. Vendors choosing to opt for additional promotion and willing to pay the extra fee will be categorised as a separate class. Any promotion or advertisement of such vendors' products would then ideally not be discriminatory.

For instance, Amazon Prime is a similar model at the customer front. Prime members are eligible for faster delivery of products of vendors falling under the Prime category. For a vendor to come under the Prime category, its orders need to be fulfilled by Amazon by paying additional fees for the services. This logistically makes it easier for Amazon to provide faster delivery of products which are stored in its warehouses across a region. From a vendor's perspective, this arrangement would not be considered discriminatory since the offer to have orders fulfilled by Amazon is open to all vendors registered on the platform.

Thus, where intelligible differentia can be proven between one set of vendors and another, it could be inferred that the same would not be hit by the restrictions under the renewed FDI Policy.

Exclusivity should not be mandated by the platform

In case of exclusivity contracts, where such exclusivity contract is not mandated by the platform, additional promotion can be provided by the platform. However, establishing an exclusivity contract as vendor negotiated would be the tricky element. Unless a mechanism to identify the same is carved in, the renewed FDI Policy appears to ban all exclusivity deals.

Vendors in which the marketplace entity has equity cannot use the platform

Restriction on vendors in which the marketplace entity, or its group company, has equity participation appears to be a bit ruthless. Any such vendors will not be permitted to sell their products on the marketplace platform. With most FDI based e-commerce platforms having formed joint ventures, where such entities' main business is to sell goods on the platforms, this restriction looks like the last squeeze. It will not be surprising to see such vendors being delisted from the respective marketplace platforms.

With such practical gaps, the DPIIT will hopefully issue clarifications to ensure that foreign investments are not impacted adversely. For exclusivity deals, if the idea is to protect vendors, it would be helpful if vendor negotiated exclusivity deals are carved out. Similarly, a threshold-based equity restriction as opposed to a blanket restriction on vendors selling on platforms could assuage the discomfort. However, till then, it will be interesting to see the varied business models that e-tailers come up with and the changes they implement to be legally compliant and have commercial sense.

L Badri Narayanan is Partner & Gunmeher Juneja a Legal Analyst from Lakshmikumaran & Sridharan Attorneys

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