India’s new rules for marketplace investment

India’s Department Of Industrial Policy & Promotion has clarified it’s position on Foreign Direct Investment (FDI) for marketplaces. The announcement contains both good and bad news for the largest Indian marketplaces such as Amazon and Flipkart.

Up until now B2B marketplaces have been allowed FDI and Amazon and Flipkart have both skated around the rules even through they sell to consumers. Now India has blessed FDI for marketplaces but with some restrictions which could prove troublesome.

100% FDI is allowed for marketplace businesses (great!). FDI is not permitted for inventory based ecommerce – that means the marketplace can’t own the stock that they sell. Even worse (for marketplaces which use an Indian subsidiary to supply stock) no more then 25% of stock can come from one supplier or group of companies.

Cloudtail India is a joint venture between Amazon and Catamaran Ventures and thought to be one of the biggest retailers with as much as 40% share of sales. That’s a problem with the new 25% limitation. Similarly Flipkart has a subsidary, WS Retail, which provides the lions share of sales.

Another wrinkle is a clause stating that marketplaces are not permitted to directly or indirectly affect pricing. Both Flipkart and Amazon hold sales days (think of the Indian equivalent of the UK Amazon Prime Day). It’s common for the marketplace to fund discounts to attract buyers to the marketplaces and that’s now effectively been banned.

It’s already tricky for western retailers to sell on Indian marketplaces. Generally the easiest route is to partner with an Indian retailer who effectively buyers your product and retails it – effectively acting as a trading assistant. The new rules will also hamper Indian retailers and manufacturers who sell directly to the marketplaces (or their rather their subsidiaries). These were quite possibly the most attractive Indian retailers to partner with but with the 25% rule it now makes sense to seek out smaller Indian retailers to supply.

Pentagon have considerable experience in selling to India and highlighted the opportunities and challenges at their recent Fashion Without Borders event. Pentagon CEO Laurence Guy told us “India is the biggest growth opportunity in the world today. The new guidance underscores the importance of this sector to the Indian economy and clearly the rules will evolve over the coming months and years. We operate as an aggregator in India precisely because the situation is unclear and for the foreseeable future retailers with inventory to sell to Indian consumers will need to work with companies like us to take advantage of this incredible opportunity“.

Doubtless there’ll be some clever manoeuvres from the marketplaces to work within the new rules. If you’re selling to India let us know if you’re affected.