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India considering changes FDI in e-commerce rules: Report

E-commerce

India is considering revising its rules for foreign direct investment in e-commerce, reportedly to prevent e-commerce marketplaces from having an indirect stake — through their parent companies — in the seller entities which sell products on the marketplaces. Reuters first reported this on Tuesday. The changes will come in through a press note — as the last restrictions in 2018 did — a spokesman from the Ministry of Commerce & Industry told the publication.

Who will this impact?

Any regulation that attempt to change ownership could hit Amazon, as it holds an indirect equity stake in two of its biggest online sellers.

India only permits foreign companies to invest in marketplace-based e-commerce operations; e-commerce companies owning inventory are not permitted to have foreign investments. India’s latest Press Note 2, 2018 had attempted to address exactly this: to reign in how much marketplace can influence sale of products to their own benefit. The Press Note placed further restrictions on FDI in e-commerce:

  1. It prohibited marketplaces from offering products from sellers in which they have an equity stake.
  2. It said that if more than 25% of the sales on a marketplace were undertaken by one seller, then its inventory will be deemed to be controlled by the marketplace e-commerce company, and such sales will therefore be barred.
  3. It also disallowed marketplaces from influencing the sale of goods directly or indirectly.

After Press Note 2 of 2018 became effective, Amazon had changed the ownership structure of Cloudtail, reducing its own ownership structure in Cloudtail’s parent company to 24% and increasing Catamaran’s stake to 76%.

Now, the Ministry of Commerce is looking to considering “adjusting some provisions”, per the report, to prevent arrangements by e-commerce companies through which they are able to bypass some of these rules.

Where is this coming from?

For year, physical retailers and associations have for years demanded more government control and oversight over the operations of Amazon and Walmart-owned Flipkart. They have accused the two companies of creating structures to bypass central government regulations, of flouting government regulations around deep discounting, and even violating FDI rules.

It’s worth noting that in November 2020, retailers’ body CAIT lashed out at Amazon and Flipkart, asking that they penalised for violating foreign investment rules. Both companies control inventories being sold on their respective e-commerce marketplace platform, the body claimed. Flipkart does this via its “affiliate companies” like WS Retail and Omnitech Retail, while Amazon does this via companies such as Cloudtail, and Appario Retail, it had alleged.

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