As the revised FDI laws force Flipkart and Amazon to cede control of inventory sold on their platforms, the two firms could look at compensating for this loss with an increased focus on private labels, something which could have the added benefit of yielding higher margins.
The government’s notification on December 26 disallowed any seller in which a marketplace had equity participation from selling on the platform, but a clarification that followed allowed these firms to own private labels, which could be used as a loophole, say experts.
“While on one hand the authorities have said that the inventory based model is not allowed, at the same time private labels, most of which are contract-manufactured products, are allowed. These can also be termed as inventory based,” said Atul Pandey, partner at Khaitan & Co.
The law leaves it open to interpretation whether a manufacturer in which Flipkart or Amazon has equity is allowed or disallowed to directly sell on their platforms. In sectors such as manufacturing, the government allows FDI through the automatic route.
Suneeth Katarki, founding partner at IndusLaw, said if the government follows the guidelines for traditional manufacturers, Flipkart and Amazon could indeed be allowed to do this. “Currently, the law only says if you (marketplaces) have equity in an entity, that entity cannot sell on your platform. It should have specified whether these were only trading entities or even manufacturing entities,” Katarki added.
Moreover, if the government disallows the two firms from holding equity in a manufacturer who then sells on their platform, it could violate the FDI norms for the manufacturing sector, creating a catch-22 situation. It would also conflict the government’s own agenda of promoting manufacturing in the country.
“Since private labels provide opportunities for local manufacturers or small-scale industries, the government may not immediately come out with a clarification on this,” added Pandey.
Source: The Economic Times