Thu,Mar312016.

1210PMIST

Ecommercefirmswillhavetorestructurebusinesses
Firmswhichhaveamixofmarketplaceandinventorybusinessmodelswillhavetoclearstandsoon

NewDelhi/Bengaluru:Adayafterthegovernmentapprovedforeign
directinvestment(FDI)withridersinonlinemarketplaces,lawexperts
saidmanyecommercecompanieswillhavetoreworktheiralready
complexcorporatestructures,addingthattherewaslittleclarityon
theimpactofnewlawsonInternetcompanies.

ThegovernmentonTuesdayallowed100%FDIinonlineretailof
goodsandservicesunderthesocalledmarketplacemodelthrough
theautomaticroute,whichwouldlegitimizeexistingbusinessesofe
commercecompaniesoperatinginIndia.

Undertheinventorymodel,theecommercefirmbuys,stocksand
sellsgoods,whileinthemarketplacemodel,itsimplyactsasa
platformconnectingbuyersandsellers.

FashionretailerssuchasFlipkartsMyntraaremovingtoa
Atleastthreeconditionsattachedtothegovernmentsapproval,
marketplacemodel,butcurrentlydependononesellerfor
however,couldeitherhurtecommercecompaniesorforcethemto
mostsales.Photo:Bloomberg
findnewwaystogetaroundthem.

One,nogroupcompanyorselleronamarketplacecancontribute
morethan25%ofthesalesgenerated.Two,marketplacescannotinfluenceproductprices.Three,smallsellerswillnowhavetotake
responsibilityofqualityofgoodsandaftersalessupport.

Thebiggestblowwouldbeforthosewhodeployamixofinventoryandmarketplace.Thesecompaniesmaybeforcedtorestructuretheir
businessestoabidebythelaw.

FashionretailerssuchasMyntraandJabongaremovingtoamarketplacemodelbutcurrentlydependononesellerformostsales.While
Myntragetsover90%ofitssalesfromVectorecommerce,JabongssaleslargelydependonXerionRetail.

MyntraandJabongdidnotrespondtoMintsqueries.

Severallawyersandindustryexpertspointoutthatthecompanieswhichtillnowhavebeenswingingbetweenamarketplaceandinventory
ledbusinesswillhavetotakeaclearstancesoon.

Thenewlawiseffectivesinceyesterdayandhardlygivesbreathingtimetocompaniestoimplementthechanges.However,ifthese
companiescontinuetooperateunderambiguity,theycanbeseverelypenalizedbythegovernment,saidAkashGupt,partnerandleader
regulatoryatPwCIndia.

WhileecommercegiantssuchasFlipkartandAmazonwillhavetofindnewsellerstoreducedependenceonlargesellers,marketplaces
suchasfurnitureretailersFabfurnishandPepperfrywillhavetocomplywiththelawbyclearlyprovidingsellernameanddetails.

Thenewregulationsleavelessroomforfirmstofloutlawthroughalternatestructures.Thecleardefinitionofecommercemarketplace,
inventoryledbusinessandthe25%salenormwillstopcompaniesfromdisguisingtheirbusinessesundermarketplacemodelwhilethey
aredoinginventoryledbusiness,saidAngshumanBhattacharya,managingdirectoratAlvarez&MarsalIndia,aconsultancyfirm.

Severalecommercecompaniesstartedoperationswithinventoryledmodels.However,sinceFDIwasntallowedindirectonlineretail,
thesecompanieshadtoberestructuredtoaccommodateforeignmoney.Mostcompaniesmovedtoatwolayeredstructurewithawholesale
tradingarmthatgotalltheforeigncapitalandanindependentcustomerfacingentitythatrantheonlineplatformandsoldtothecustomer
directly.
Flipkartfollowedasimilarcomplexstructureuntil2013(Readhere),whenitstartedmovingtoamarketplacemodel.

WhiletheregulationsaroundthewholesaletradingandB2Cecommercemodelhaveremainedunchanged,companiesfindlittleorno
valueinthismodelandprefertorunamarketplace.

IftheforeigninvestmentisbeingmadeintheB2Bentitywiththeecommerceplatformbeingrunbyaseparatefrontendentity,thevalue
mustbecapturedinthewholesaleentity.Theadvantageofthemarketplacemodelisthatthevalueofthebusinesscouldbeshiftedtothe
platformentity,saidRahulMatthan,partner,Trilegal.

Thesecondconditiononaftersalesandwarranty,Matthanadded,clearlyreemphasizetheroleoftheinventorymodel.Therewillbe
severalunintendedconsequencesoftheseregulations.Forinstance,smallvendorswhoonlycameontoonlineplatformsbecauseofthe
comfortthatpostsaleissueswouldbehandledbytheecommercemarketplacemaynolongerbewillingtotradeonthesemarketplaces.

Thethirdconditionisthebanoninfluencingproductprices,amongotherridersforapprovingFDIinecommercemarketplaces.

Ecommerceentitiesprovidingmarketplacewillnotdirectlyorindirectlyinfluencethesalepriceofgoodsorservicesandshallmaintain
levelplayingfield,theDepartmentofIndustrialPolicyandPromotion(DIPP)saidinanoteonTuesday.

However,itsdifficulttosayhowthenewruleswillbeimplementedandtowhatextentthesewillbefollowed.

Itsverydifficulttoseehowonlineretailerswillbeallowedtocontinuediscounting,saidStephenMathias,partneratKochharandCo.,a
lawfirm.Thenewlawsareveryclearthatmarketplacesshouldntinfluencepricing,directlyorindirectly.Itwouldnotbelegalfor
marketplacestogivediscountsnow.

Theendofdiscounting,ifithappens,wouldsignificantlyhurtthehighvaluationsofIndiastopecommercefirmsFlipkart($15billion),
Snapdeal($6.5billion)andPaytm(morethan$3billion)aswellastherapidsalesgrowthofAmazonIndia.

Onlineretailgrewrapidlyto$14billionlastyearfrom$1billionin2012fuelledbyventurecapitalinvestors,whopumpedinmorethan$9
billionoverthepasttwoyearsalone.Ahugechunkofthismoneyhasbeenspentonluringcustomersthroughadvertisingand,more
importantly,discounts.

Manyexperts,however,saidcompanieswillfindnewwaystofunddiscountsthoughnoonehadclarityonthespecifics.

Thenewrulespurportedlyseemtobandiscountingbytheecommercemarketplacebutitmaynotstopsellerstoprovidediscounts,said
VaibhavParikh,partner,NishithDesaiAssociates,alawfirm.Ecommercecompaniesandtheirsellersmaybeforcedtothinkfreshonthis
point.The25%restrictiononsalesfromavendorisanotherpainpointformanyecommercefirms.Wewillhavetoseehowthiswillaffect
thestructuresofcompanies.