The Department for Promotion of Industry and Internal Trade (DPIIT) has rejected Flipkart’s proposal for entering the food retail sector, owing to a “regulatory issue”, news agency PTI reported. The DPIIT told Flipkart that it can not be allowed into the food retail business as an entity that runs a marketplace, or has equity in it, according to the Times of India. We have reached out to Flipkart for comment. Flipkart had set up an entity called FarmerMart in October 2019 to sell locally sourced food products, and had said applied for a license to operate in the food retail sector.

Flipkart’s main rival in India, Amazon, had received the license to venture into food retail back in 2017. But since then, the government has tightened FDI norms for e-commerce marketplaces. In February 2019, as Press Note 2 came into effect, it made amendments to the rules related to FDI and inventory in e-commerce companies that have foreign direct investment. Under the rules FDI-funded marketplaces — such as Flipkart and Amazon — are barred from exercising control or ownership over the inventory of vendors on their platforms.

FDI in e-commerce rules

The Department of Industrial Promotion & Policy revised its guidelines on FDI in e-commerce and set out new rules for marketplaces and vendors, with relation to inventory and FDI. The new guidelines came into effect on February 1, 2019:

  1. The updated policy does not allow marketplaces to exercise control or ownership over the inventory of vendors on their platforms. For example, if a marketplace such as Amazon or Flipkart exercises ownership of control over inventory, this platform would no longer be a marketplace, but an inventory-based e-commerce business.
  2. The new policy reiterates that if a vendor sells over 25% of goods (presumably of all the goods sold on the platform) on the e-commerce marketplace, the marketplace will become an inventory based model in which FDI in not allowed. To be clear, the earlier FDI in e-commerce policy from 2017 had the same 25% cap on vendor sales, but now it places the responsibility on the marketplaces to ensure this does not happen.
  3. If a marketplace has an equity stake in a vendor/seller, or if it controls its inventory, the vendor is not permitted to sell its products on the marketplace.
  4. Warranty and guarantee of goods and services sold on marketplaces is the responsibility of the seller/vendor, and not the platform.
  5. The marketplace cannot influence prices directly or indirectly and has to offer a level-playing field all vendors/players – those controlled by marketplaces, or other vendors. Platforms will provide the same services of cash backs, fulfilment, logistics, warehousing, advertisements, marketing, payments, finance, etc across all vendors.
  6. The new norms dictate that marketplaces cannot mandate any seller to sell any product exclusively on the marketplace.