The law is made, but they found perfect way to surpass
February 1st has been given as deadline for e-commerce companies to stop selling products from their group companies. In compliance with the circular these related companies suspended their operations, the market felt the days of big discounts or big deep discounts are over for the e-commerce giants. Without much surprise they made their come back in style with new ownership structure, they are no longer group company of marketplace.
Why such restructuring was necessary?
On December 26 the government issued a circular prohibiting the marketplace and their group companies from equity participation in any of their sellers or control over inventory, affecting Amazon and Flipkart the most. They were operating through such system to dominate the retails marketplace and to some extent monopolistic and restrictive trade practices.
E-commerce marketplaces supposed to provide equal playing platforms for all retailers across the world, to enable the customer to have choices and retailers to reach customers without any geographical boundaries.
E-commerce landscapes are going through a tough phase. FDI regulations does not allow Foreign Direct Investments in inventory based e-commerce to consumers. That means e-commerce companies who want to list their products in e-commerce marketplaces cannot expect FDI. However it allows FDI in marketplaces where independent sellers can list and sell goods. Retailers are alleging that e-commerce giants are violating rules and actually holding their own stock and selling at deep discounts.
Case of Cloudtail and Appario
Catamaran Ventures, NR Narayana Murthy’s company was holding 76% stake of Prione Business Services, which is the holding company of Cloudtail. Amazon Asia was holding 49% of the company. According to a 2013 notification of the RBI with regard to FDI in India, a group company means two or more enterprises, which, directly or indirectly, are in a position to exercise 26% or more voting rights in the other enterprise or can appoint more than 50% of the members of the board of directors in the other enterprise. In the above case Cloudtail fits in to the definition of group company and Amazon can not allow Cloudtail to use its marketplace to sell the products.
Appario is a subsidiary company of Frontizo, a joint venture between Patni Group and Amazon Asia Pacific Holdings. Patni Group was holding 51% stake and Amazon Pacific Holdings 48%.
The restructuring was necessitated due to the new norms announced , which prohibits marketplaces and their group companies from equity participation in any of their sellers or control over inventory, affecting Cloudtail and Appario the most, They stopped selling on Amazon on February 1st.
The end was not that…… we make laws…they find ways to jump.
The business is booming, online market places were making money through big sales and selling products through own companies. Then the government came with big axe to support retailers, so that they will get an equal playground to do business. Due to this new business model, where online market places supposed to provide business platform to retailers, the market places were in a way eliminating the retailers from the market. This was done by creating own companies to sell products which they distribute or retail in the marketplaces with big discounts.
Do these big players will forget the substantial profit they were making???
They have taken less than a seven days time to find a way out. Both Cloudtail and Appario went for shareholding restructure, where they ensured that Amazon’s holding in these companies are less than 25%, so they will not be treated as group companies. Catamaran and Patni increased their stake and Amazon reduced. The same was followed by other marketing places and the big discounts are back.
Rajeev Thekkeettil ACS
Artha Institute of Management