E-commerce firms may explore options to meet new norms
Analysts FE spoke to said both Flipkart and Amazon will have to disband their current structures of doing business wherein they hold equity stakes in companies which sell products on their platforms.
E-commerce companies having foreign direct investment, like Flipkart and Amazon, will now have to look for ways to restructure their businesses so as to obviate the curbs on selling products of companies in which they have an equity stake. The government’s new FDI guidelines also restrict them from selling exclusive-only products on their platforms.
The jury, however, is still out on how easy or difficult it would be for e-retailers to carry on with their model of discounting after engineering structural changes.
Analysts FE spoke to said both Flipkart and Amazon will have to disband their current structures of doing business wherein they hold equity stakes in companies which sell products on their platforms.
“E-commerce players need to relook their operating strategies in India on account of the new rule on cap on equity participation by them in their suppliers entities. Going forward, suppliers will not be permitted to sell their products on the platform run by such marketplace entity. This will impact back-end related wholesale group entities and need to remove them from the e-commerce value chain. Time has come to look at franchise channels, rather than equity investments channels to do business in India,” said Rajiv Chugh, national leader, policy advisory & speciality services, EY India.
Franchise model means companies like Flipkart and Amazon need to enter into re-seller agreements with Indian companies and sell their products. Since these companies will store and sell multiple brands they won’t come under the clause which restricts these platforms from selling exclusive-only products. For Flipkart and Amazon, the other option according to some analysts, is lowering their equity in the supplier companies to below 26 per cent. Chugh said the FDI guidelines define group companies as ones having 26 per cent or more equity by the parent firm. If, for instance Amazon reduces its stake below 26 per cent in its supplier firms, the current selling arrangement can carry on.
On revised FDI guidelines, Flipkart in a statement said: “Government policy changes will have long-term implications for the evolution of the promising sector and whole ecosystem. It is important that a broad market-driven framework through right consultative process be put in place in order to drive the industry forward”. Amazon India only said that it is still evaluating them. —FE
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