Amazon and Flipkart are speechless after India announces new foreign investment rules

The Indian government has clarified its policy for foreign direct investment in the fast-growing e-commerce sector. And the new policy seems to have left some of the large incumbents dumbstruck.

India has allowed 100% FDI in online retail consumer businesses that operate as marketplaces – companies that act as a facilitator between buyers and sellers by providing a technology platform.

But FDI will not be allowed in inventory-based models, where the company owns the goods that are being sold through its platform, the Department of Industrial Policy and Promotion said in a notice (pdf) on March 29.

Most of the large e-commerce players in India operate as marketplaces. But these kinds of companies will not be permitted to have more than 25% of their sales come from one vendor, even if that vendor is the company itself.

This could leave two of India’s largest online retailers – Flipkart and Amazon – in a fix.

The largest seller on Flipkart’s platform is a Flipkart subsidiary, WS Retail. Flipkart does not disclose what share of its overall sales comes from WS Retail, but analysts told Quartz that it would be easily above the new 25% threshold. Similarly, around 40% of the sales on Amazon India come via Cloudtail India, which is a joint venture between Amazon.com and Infosys co-founder NR Narayana Murthy’s investment business, Catamaran Ventures.

Flipkart declined to comment on the new rules. Amazon India said it was studying the changes and would comment later.

Nasscom, a trade group representing the Indian IT sector, said in a statement emailed to Quartz that the 25% cap “may prove to be restrictive, more so if the vendor sells high-value items.” It also said the industry “might face difficulties in case of sale of electronic items, where a vendor may be offering exclusive access to certain items or discounts.”

Another potential roadblock: The government also said that e-commerce marketplaces will not be allowed to influence the selling price for goods and services listed on their platforms.

Online retail in India has so far thrived on deep discounting, with companies often using their own pockets to subsidise consumers. So this new rule may lead to added pressure on players.

Tongue-tied

The e-commerce sector in India evolved without clearly articulated policies, mainly because the country’s commerce laws predate the advent of the industry there. While the large e-commerce players in India had long been grumbling about the lack of clear regulations, they also exploited the benefits that this ambiguity provided.

But now that the government has clarified its policies, two of the largest players in the sector had nothing to say about it.

However, another large player, Snapdeal, showed no such reticence. It quickly voiced support for the new rules.

“These guidelines recognise the transformative role that e-commerce marketplaces will play in the Indian market,” the company said in a statement emailed to Quartz. “It is a comprehensive announcement which will pave the way for accelerated growth of the sector in India.”

Of course, Snapdeal can afford to be upbeat about the policy – it does not have a single large seller, unlike its big competitors.