MUMBAI (NewsRise) -- India's first ever norms on foreign investments in online marketplaces could spell trouble for some of the nation's largest e-commerce companies, including local champion Flipkart Internet and the unit of Amazon.com, as it crimps their ability to control the sales and prices of products sold online.
India's Ministry of Commerce, on Tuesday, set guidelines for the nation's e-commerce sector for the first time, saying it would allow up to 100% foreign investment in online marketplaces that offer their technology platforms to sellers.
But the guidelines came with a set of riders, including one that outlawed e-commerce companies from influencing the prices of goods sold on their websites, and restricted the proportion of sales by a single merchant on each platform to up to 25%.
India still doesn't allow e-commerce companies to own the inventory of goods they sell online.
While the proposed guidelines offer the much-anticipated regulatory clarity for prospective companies looking to set up shop in India, they also suggest an end to the thriving discount-led price competition in India's ecommerce market, say analysts. The nation's e-commerce is booming, as more Indians go online to purchase everything from books to clothes, accessories, electronic goods and even automobiles. Analysts predict the $16 billion Indian e-commerce market to outpace the growth of China and the U.S. to touch $119 billion in the next four years.
"We believe restrictions on e-commerce marketplaces from directly or indirectly influencing the sale price of goods or services, and guidelines on maintaining a level playing-field suggest e-tailors may not be allowed to offer discounts, or cash-back on goods, or to incentivize sellers to discount goods in lieu of other services," Goldman Sachs said in a note to clients on Wednesday. "As such, this could spell an end to current aggressive pricing and discounting- led competition to acquire and retain customers."
Home-grown companies such as Flipkart, Snapdeal.com and Paytm have raised billions of dollars from venture capitalists amid intense competition. The local unit of Amazon.com has also pledged to invest $2 billion. These companies have been burning millions of dollars, offering deep discounts to lure more consumers, leaving little scope to turn profits.
The combined losses faced by India's e-commerce companies as a result of their discounting strategies stood at almost 10 billion rupees ($150 million), according to an estimate published by PricewaterhouseCoopers India in 2015. "With valuations of e-commerce companies skyrocketing, there is increasing pressure from investors to cut down on discounts and concentrate on making profits," PwC said.
Some analysts say the restriction on discounts is a blessing for the sector, as companies may now be forced to focus on the path to profitability.
Amit Bhave, a director at CRISIL Ratings, expects the new guidelines to act as catalyst for e-commerce companies to shift to a "more sustainable business model," focusing on optimising processes such as supply chain, warehousing and logistics, rather than using deep-discounting tactics to acquire customers.
Snapdeal.com, the marketplace owned by Jasper Infotech, welcomed the government move. "These guidelines recognize the transformative role that e-commerce marketplaces will play in the Indian market," said Rajnish Wahi, senior vice president for corporate affairs and communication at Snapdeal. The company declined to comment further.
Still, the move to limit the sales from one merchant to 25% deals a blow to the business models of some e-commerce companies that have large retail firms selling a bulk of products on their web platforms.
W.S. Retail Services, once a retail arm of Flipkart, is the single largest seller on Flipkart.com, accounting for more than 25% of the company's sales, according to several media reports.
Similarly, Cloudtail India, a joint venture between Catamaran Ventures and Amazon.com, is the single largest seller on Amazon.in, accounting for at least 40% of its sales, according to a report on Mint newspaper on October 29.
Catamaran Ventures is the investment firm of N.R. Narayana Murthy, the main founder of India's second-largest software exporter Infosys. Representatives for both Amazon and Flipkart didn't immediately respond to e-mails seeking comments.
Further, online companies that specialize in selling specific categories of products such as furniture, groceries and apparels may now have to recast their business models, as a bulk of their sales come from their own brands that offer higher margins.
According to Goldman Sachs, the ceiling of 25% of sales from one vendor may restrict e-tailors from pushing retailing arms which are owned by them or their group.