Amazon and Flipkart may be in trouble after India’s policy change. Snapdeal is happy

Photo credit: Garry Knight.

Be careful what you wish for.

That must be what the top brass at Amazon India and Flipkart are thinking, after India just showed them who is Big Daddy when it comes to making , and maybe breaking, policies.

Late on Tuesday, the country allowed 100 percent foreign investment in marketplace e-commerce companies, formalizing rules for the multi-billion dollar sector for the first time.

Marketplaces are neither allowed to influence discounts, nor to have sales of more than 25 percent from one vendor

A 100 percent foreign investment is what all the companies have been clamoring for, and a lack of clear regulations have often subjected them to media and government scrutiny.

The government has now said it will allow them just that – 100 percent foreign direct investment in marketplace ecommerce companies – which will also be allowed to provide services including warehousing, inventory, and payments processing to merchants.

Protectionist laws in India have forced Amazon, Flipkart, Snapdeal, and others to operate as marketplaces, where they do not own inventory, but act as platforms that connect buyers and sellers through support services for a commission.

In such, this change by the government should be treated as a monumental victory by the companies, saving them from charges of bending the law while allowing foreign money to fuel growth, but Flipkart had no immediate comment and Amazon said it was still “looking at the details.”

Details, please

Photo credit: Eugene Zemlyanskiy.

While foreign investment has been given the go-ahead, the Indian government tightened its leash by adding caveats. Marketplaces are not allowed to influence discounts any more, and neither are they allowed to have sales of more than 25 percent from one vendor.

Now that should be enough to make Flipkart and Amazon lose sleep. Though these companies are technically marketplaces, Amazon generates about forty percent of its sales from a vendor called Cloudtail India Pvt Ltd, a joint venture between the ecommerce site and N.R. Narayana Murthy’s Catamaran Ventures.

The gigantic valuations of Flipkart, Snapdeal and Paytm are based on their ability to discount

Flipkart is said to be generating the lion’s share of its sales from a vendor called WS Retail, which was originally founded by Sachin and Binny Bansal.

“The new law is a welcome move. We have been asking for clarification and a level playing field. Many of the marketplaces were acting as pseudo retailers, which will be debarred now,” Kumar Rajagopalan, CEO of the Retailers Association of India told Tech in Asia.

The new laws make both the companies’ operating model defunct and even potentially illegal.

The government also cracked its whip on discounts, saying online marketplaces will not be allowed to influence discounts – the mainstay of online sales in India.

Though technically none of the players force its vendors to slash prices, the typical practice is that startups “recommend” an amount of discount to its vendors, who typically fall in with the suggestion, because the deficit is taken care of by the companies.

The new rules will effectively put an end to the crazy discounting Indian customers have been used to for the past few years.

Moreover, the gigantic valuations of Flipkart, Snapdeal and Paytm are based on their sales growth numbers, which have, till date, been fueled by their ability to fund discounts.

“If marketplaces were really like online malls, retailers would have welcomed the move. But they were acting as retailers while being called marketplaces. That creates an unlevel playing field,” Kumar Rajagopalan said.

Snapdeal’s smiling

The Alibaba and Softbank-backed Snapdeal is the only company of the top three that can’t contain its smiles.

“Snapdeal welcomes the government’s move to provide clarity to India’s fast growing e-commerce industry through the guidelines issued today,” Rajnish Wahi, senior vice president of corporate affairs and communications said.

Unlike Amazon and Flipkart, Snapdeal CEO Kunal Bahl has maintained he has built Snapdeal as a pure play marketplace, in the shadow of Alibaba, without depending too much on any one vendor.

“True marketplaces like Snapdeal have democratized commerce, providing millions of businesses a platform to sell beyond their geographic boundaries. It is a comprehensive announcement which will pave the way for accelerated growth of the sector in India,” Rajnish said in a statement.

One can’t help notice the “true marketplace” dig, possibly leveled at its bigger competitors.