New FDI policy delivers major blow to Indian ecommerce websites

Ecommerce websites like Amazon, Flipkart and Snapdeal may be in a huge fix thanks to two new conditions attached to the recent approval of 100% ecommerce FDI in India. According to the new rules, no group or seller on any online marketplace can contribute more than 25% of generated sales. Secondly, discounts offered by online marketplaces have been banned completely.

In the first scenario, a restriction of 25% of sales from one particular seller has been made to ensure that no ecommerce website flouts fair trade practices by promoting a particular seller of their choice. For example, WS Retail Services Pvt. Ltd makes for the largest seller on Flipkart, clearly contributing more than 25% to the online marketplace’s sales. This will now have to change and Flipkart will have to increase the number of sellers on its platform in order to fulfill the new conditions. Same rules apply to other ecommerce players who depend on large sellers for a chunk of their sales.

As far as online discounts are concerned, a note released by the Department of Industry Policy and Promotion (DIPP), on Tuesday said “Ecommerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field.”

Online sales such as Flipkart’s Big Billion Days Sales or Amazon’s Diwali Sales have been creating a difficult environment for brick and mortar sellers because of the attractive deals offered on these platforms. An example of how online sales are influenced by ecommerce platforms is Amazon’s ‘promotional funding’ route. With promotional funding, Amazon funds the discounts offered by its sellers. It recommends a discounted price to the sellers and the sellers in turn have an option of keeping the suggested discounts. After taking on the suggested discount price by Amazon, sellers then present the company with a debit note of the discounted price and Amazon refunds/finances the discounted sum to the seller by cheque. This way, online sellers don’t actually have to discount their prices, as they are later paid back in full by the ecommerce company.

Such a practice will now have to cease if the new marketplace rules are followed. The news will definitely create an even more challenging environment for the three big ecommerce companies – Amazon, Flipkart and Snapdeal, which already find themselves reeling under huge financial losses.