We are ending our series of Splainer AMAs for our birthday month with a bang! No introduction we offer to Mr Tharoor could possibly do true justice to his career and achievements. Suffice to say, we are delighted to have him as our guest—and that you will have the opportunity to speak directly with him. Time/date: Saturday, June 26 at 6:30pm. Sign up here to reserve your place. Please note this event is open to all subscribers!

PS: ICYMI, our AMA with Sandip Roy was an illuminating, lively and wide-ranging discussion on queer identity, culture and politics—and their intersection with caste, race and gender. We also learned a lot about ‘passport princesses’ and ‘curry queens’ lol! Be sure to check it out here.

New rules to target Amazon & Flipkart

TLDR: For the past few years, the government has been tightening the screws on foreign-owned e-commerce giants—to favour Indian traders and merchants and local rivals like Reliance. The latest salvo will come as a big blow to not just these platforms, but also its biggest sellers and you, dear customer.

First, some extended background

The government’s big plan: The government’s primary aim is to benefit Indian entrepreneurs—be they small and medium-sized merchants or big boys like Reliance. And it has been steadily working toward limiting the advantages enjoyed by big global ecommerce platforms, be it Amazon or Walmart-owned Flipkart. And it has done so by taking aim at practices that are at the heart of their business model.

The ecommerce MO: 

• At first blush, Amazon and Flipkart are just vast marketplaces—where a wide range of sellers jostle to sell you their wares. 
• But in reality, some sellers are more special than others—and are called ‘Special Merchants’. 
• Both companies have partnerships with certain sellers who are covertly given preferential treatment—so they can outsell their rivals on the platform by giving you a cheaper price. 
• These platforms also use their financial clout to bully/coax all sellers to offer bigger and bigger discounts—so that offline merchants simply can’t compete. 
• All of which create a rigged marketplace.

The Cloudtail example: Since foreign ecommerce companies are forbidden from selling directly to customers, Amazon set up a joint venture with Narayana Murthy’s Catamaran Capital to set up a company called Cloudtail in 2014. It owned 49% and Cloudtail operated essentially like an Amazon proxy—with big benefits: 

• The wholesale companies owned by Amazon would sell products at vast discounts to Cloudtail—which in turn would undersell everyone else on Amazon.in. 
• Or Amazon would broker Cloudtail’s exclusive relationships with tech companies like Apple, One Plus etc. so it became the only company allowed to sell their products—and only on Amazon. 

Point to note: Internal documents show that one of Amazon’s goals was “to ensure Cloudtail accounted for 40% of Amazon.in sales, ‘and build this into a $1+B business’ in 2015.” 

The first government salvo: In 2019, the government notified a new set of rules that took aim at these practices. These stipulated that:

• Amazon, Flipkart et al cannot sell products of any company in which they own any kind of significant stake. 
• They can no longer ink exclusive ‘sold only on…’ deals with companies.
• No seller on their platform can source more than 25% of their inventory from wholesale units owned by either company.

The great workaround: Amazon promptly cut back its stake in Cloudtail, reducing it to 24%—so it would not be considered as part of the Amazon group. Others like Flipkart created so-called “middle layer” companies—in which it again owned less than a 25% stake—between its wholesale arm and sellers. In general, loopholes were found and business resumed as usual.

The big probe: But since governments and business rivals are not exactly stupid, the problem didn’t go away. Instead, in January 2020, India’s antitrust watchdog, the Competition Commission of India, opened a probe into Amazon and Flipkart, citing four anti-competitive practices: exclusive launch of mobile phones on their platforms, promoting preferred sellers on their websites, deep discounting, and prioritizing some seller listings over others.

Point to note: Both Amazon and Flipkart are currently in court, fiercely fighting to block the probe.

The government’s latest move

Tired of this ongoing game of chess, the government has moved to strike a potentially decisive blow to Amazon and Flipkart. It unveiled a draft of a new ecommerce policy that stipulates:

One: Any company “related” to the platform cannot engage in activity on that platform—which is forbidden to the platform itself. A “related party” is defined as any company in which the platform owns a 10% stake or more. Translation: If Amazon is banned from selling to customers so is Cloudtail.

Two: No marketplace e-commerce entity can sell goods or services to any person who is registered as a seller on its platform. Translation: Amazon etc can no longer use their wholesale arm to give big discounts to Special Merchants so they can undersell their rivals.

Three: The ecommerce platform cannot offer lower fees to sellers to incentivise them to offer bigger discounts to their customers. This is currently standard practice during the big sales. Translation: Say goodbye to those massive Diwali discounts.

Four: Also a big no-no, sudden flash sales if they “are organised by fraudulently intercepting the ordinary course of business using technological means” and are aimed at benefiting  “a specified seller or group of sellers.” Translation: is unclear since it may or may not cover festival and other big sales.

Five: No user information collected by the platform can be shared with “related parties.” Amazon has been frequently accused of using customer data to launch rival products under its private label. In India, since it can’t have a private label, Amazon allegedly did the same with its Special Merchants. Translation: Amazon or its partners can’t profit from your data.

Six: Ecommerce platforms will have to share clear information about the country of origin—and provide filters that make it easy for the customer to do the same. Translation: The government is still obsessed with ‘Made in China’ products, and is hoping that patriotic Indians are, as well.

Seven: To promote ‘Atmanirbhar Bharat’, the companies will have to suggest ‘made in India’ products to customers before they make a purchase. Translation: This will make online shopping way more annoying for unpatriotic Indians.

Icing on the top: The government has also slapped on its favourite compliance requirements—inspired by its digital media rules. So ecommerce platforms will also need to put in place an elaborate grievance process, including a Chief Compliance officer etc. And they must promptly turn over any personal data on demand. 

The bottomline: As expected, Indian merchants love the new draft. The Confederation of All India Traders said, “The new draft is a guiding stone to purify the e-commerce landscape of the country, which has been greatly vitiated by various e-commerce global companies.” The bad news is that it may also “purify” your favourite online shopping destination of your fave products and the lowest prices.

Reading list

MoneyControl has the best summary of the new rules as they impact sellers. Indian Express focuses more on grievance and other compliance issues. Hindustan Times has the most on the flash sale rules. Reuters did an excellent investigation into Amazon India’s business practices earlier this year.