The Indian government has clarified its policy for foreign direct investment (FDI) in the e-commerce sector. And the new policy may have some major implications on Indian e-commerce gients.

India has allowed 100% FDI in online retail consumer businesses that operate as marketplaces i.e. facilitator between buyers and sellers by providing a technology platform.

But FDI will not be allowed in inventory-based models, where the company owns the goods that are being sold through its platform, the Department of Industrial Policy and Promotion said in a noticeon March 29.

Most of the large e-commerce players in India operate as marketplaces. But these kinds of companies will not be permitted to have more than 25% of their sales come from one vendor, even if that vendor is the company itself.

This could leave two of India’s largest online retailers—Flipkart and Amazon—in a difficult situation.
The largest seller on Flipkart’s platform is a Flipkart subsidiary, WS Retail. Flipkart does not disclose what share of its overall sales comes from WS Retail, but it is clearly understood that it would be easily above the new 25% threshold. Similarly, around 40% of the sales on Amazon India come via Cloudtail India, which is a joint venture between Amazon.com and Infosys co-founder NR Narayana Murthy’s investment business, Catamaran Ventures.

Analysts are saying that the 25% cap “may prove to be restrictive, more so if the vendor sells high-value items.” and the industry “might face difficulties in case of sale of electronic items, where a vendor may be offering exclusive access to certain items or discounts.”

Another potential roadblock: The government also said that e-commerce marketplaces will not be allowed to influence the selling price for goods and services listed on their platforms.

Online retail in India has so far thrived on deep discounting, with companies often using their own pockets to subsidise consumers. So this new rule may lead to added pressure on players.

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