FDI rules may help Flipkart, Snapdeal against Amazon

Legal and TaxThe new foreign direct investment (FDI) regulations that prohibit online marketplaces from offering discounts may inadvertently help e-commerce firms Flipkart and Snapdeal, which are scrambling to conserve cash and cut costs, by slowing Amazon’s advance in India, albeit temporarily.

While the three companies continue to fund discounts purportedly given by third-party sellers on their sites, they have cancelled planned sale events and accompanying advertisements until the start of the festive season to avoid potential punishment from regulators.

The cancellation will hit Amazon more than its local rivals.

Amazon, with its deep pockets, gained significant market share last year at the expense of Flipkart and Snapdeal by outspending its rivals on discounts, advertising and logistics. This, despite the fact that Flipkart and Snapdeal were flush with funds.

Meanwhile, Amazon has seriously stepped up its pace of spending. Amazon Seller Services Pvt. Ltd (Amazon India) nearly doubled its authorized capital to Rs.16,000 crore in February, exceeding its capital commitment of $2 billion made in July 2014.

After the new regulations, however, the US-based company has been forced to hold back on discount-driven sale events and accompanying ads for a few months until it figures out new methods of funding discounts and devising ad messages.

“Amazon was beating Flipkart and Snapdeal at their own game of discounting deeply so in the short term. Yes, the new regulations will pull back Amazon slightly because it cannot discount and advertise as freely as it was doing earlier,” said Harminder Sahni, managing director at Wazir Advisors, a consulting firm. “But over the long term, the regulations may be good for Amazon. It excels at customer service and offering the widest range of products. If the e-commerce game comes back to basics, Amazon will surely emerge as the winner.”

“The recent clarifications to the FDI policy give clarity to this fast-growing sector and will definitely help Snapdeal accelerate growth, since we have no corrections to make arising out of the policy clarifications,” a Snapdeal spokesperson said by email. “We are a true marketplace with more than 300,000 sellers connecting to millions of buyers across India. With so many sellers and buyers being able to discover and transact with each other through our frictionless technology platform, it is natural that consumers will continue to benefit from extremely competitive options.”

In March, the government allowed 100% FDI in online retail of goods and services under the so-called marketplace model, seeking to legitimize existing businesses of e-commerce companies operating in India.

However, the government added two riders that have far-reaching consequences for e-commerce firms. One, marketplaces cannot influence pricing of products and services on their platforms, directly or indirectly. Two, no one seller can contribute more than 25% of the sales of any marketplace.

“E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field,” the department of industrial policy and promotion said on 29 March.

The government attempted to create a level playing field between cash-rich e-commerce firms and offline retailers, which have lost millions of customers to their online rivals.

For now, however, it looks like the regulations may have accidentally created a level playing field even among the three large online retailers by temporarily neutralizing the spending power of Amazon.

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Source – Livemint

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