After revised FDI policy, Amazon to seek legal advice on food retail business

After revised FDI policy, Amazon to seek legal advice on food retail business
Photo Credit: Photo Credit: Reuters
31 Dec, 2018

Amazon India is mulling to seek legal opinion on the functioning of Amazon Retail India Pvt. Ltd (ARIPL), the global company's food retail business in the country, in the wake of the government’s decision to bar e-commerce marketplaces from selling products through companies in which they own stakes, a report said.

In a recent review of the Foreign Direct Investment (FDI) policy in e-commerce, the Department of Industrial Policy and Promotion (DIPP) had sought to tighten regulations around the inventory model, where such firms directly sell products to customers from their own inventories -- often at large discounts. 

In addition, existing regulations do not allow FDI in the inventory-based model of e-commerce. The DIPP has issued a clarification which seeks to address the issue of online retailers forming “innovative” structures through joint ventures and subsidiaries.

The clarification states that: “An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such a marketplace entity.”

According to The Economic Times, Amazon is now exploring legal opinions to decide if ARIPL can continue to sell products on the Amazon marketplace or it needs to stop on February 1, when the new guidelines will come into effect.

Besides its food business, the measures directly impact the business of the likes of Cloudtail India and Appario Retail, which are sellers on Amazon India. Amazon has developed these subsidiaries to run and manage its own inventory in partnership with local vendors. 

In 2017, US-based Amazon had secured the government’s nod to invest $500 million in the food retail sector. The government had, in 2016, allowed 100% foreign direct investment in food processing and trading, including through e-commerce, for products manufactured in India.

However, ARIPL’s operations were delayed for over a year even after the initial approval as the central government directed the retail giant to operate its marketplace and the food-only venture separately with separate equipment, machinery and warehouses, the publication reported. ARIPL began selling products on the marketplace only a few months ago.

An email query to Amazon did not get a response till the time of publishing this report.

Cloudtail, one of the largest sellers on Amazon, is owned by a 49:51 joint venture between Amazon and Catamaran Ventures, the personal investment arm of Infosys co-founder Narayana Murthy. It had net sales of around $1 billion for the year ended March 2018.

Appario is a subsidiary of Frontizo Business Services Pvt. Ltd, a joint venture of Patni group (51%) and Amazon Asia Pacific Holdings (48%).

Industry experts have said that over 60% of Amazon’s sales in the US come from its inventory, while third-party sellers account for the rest. 

As DIPP regulations do not allow this, it suits Amazon to enter into JVs with larger players to help it expand aggressively and give it more control over its inventory and sellers, which will translate into better margins and customer experience.

Like Amazon, rival Flipkart also has a captive seller in the form of WS Retail while group company Myntra’s largest seller is its distributor Vector E-commerce.

Industry observers said these measures could lead marketplaces to finance sellers indirectly instead of equity-based investing.

The development comes at a time when the government is working on a new draft of an e-commerce policy which will encompass data localisation, taxation, as well as predatory pricing and other aspects.