New Delhi/Bengaluru: India’s largest online marketplaces Flipkart, Amazon India and Snapdeal have temporarily suspended their sales so as to comply with new e-commerce regulations that ban marketplaces from influencing product prices, five people familiar with the matter said.

While the three companies continue to fund discounts purportedly given by third-party sellers on their sites, they have cancelled planned sale events and accompanying advertisements to avoid potential punishment from regulators, said the five people, all of whom spoke on condition of anonymity.

Flipkart has cancelled its plan of doing an app-only sale during the first week of May, the people said. Snapdeal and Amazon, too, have suspended their plan of holding a one-day sale event, where products across categories were supposed to be offered at massive discounts, they said.

The three companies are in the process of devising new ways to fund discounts and advertise sales, the people said. The three companies want to be ready with the new discounting mechanisms and ad messages in time for the festive season which kicks off in August and goes on through Diwali, which falls in October.

“E-commerce marketplaces don’t want to attract the ire of regulators and offline retailers right now. The government has just announced new regulations and it will be very embarrassing for them if online retailers continue as if nothing has happened. So, to avoid angering the regulators, Flipkart, Amazon and Snapdeal have put sales and advertising of sales events on hold. Now, the most important thing for them is to be ready with sales for the festive season," one of the five people said.

It’s crucial for e-commerce companies to offer deep discounts and advertise these discounts and sale events to shoppers during the festival season. The Diwali quarter typically accounts for a majority of the sales at e-commerce companies, whose valuations are based on their ability to consistently deliver high sales growth.

Online fashion retailer Myntra (owned by Flipkart), however, will hold its three-day long app-based discount sale next month as planned.

Unlike the e-commerce marketplaces, Myntra has one big seller, Vector E-commerce Pvt. Ltd, which makes it relatively easier for the company to manage its sales, said one of the five people mentioned above.

A Flipkart spokesperson declined to comment. Amazon and Snapdeal spokespersons didn’t respond to an email seeking comment. Myntra, which is owned by Flipkart, confirmed it will hold an app-based sale next month.

In March, the government allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called marketplace model, seeking to legitimize existing businesses of e-commerce companies operating in India.

However, the government added two riders that have far-reaching consequences for e-commerce firms. One, marketplaces cannot influence pricing of products and services on their platforms, directly or indirectly. Two, no one seller can contribute more than 25% of the sales of any marketplace.

These riders will force online retailers to find new ways of giving discounts and restructure their businesses.

Online retail is expected to increase to $48-60 billion by 2020 from $4.47 billion in 2014, according to a report by UBS.

The potential size of India’s online market has attracted an unprecedented rush of cash from venture capital firms and other investors, who pumped in more than $9 billion into e-commerce firms over the past two years. A huge chunk of this money has been spent on attracting customers through advertising and, more importantly, discounts.

The end of discounting, if it happens, would significantly hurt the high valuations of India’s top e-commerce firms—Flipkart ($15 billion), Snapdeal ($6.5 billion) and Paytm (more than $3 billion)—as well as the rapid sales growth of Amazon India.

That explains why the online marketplaces are scrambling to find new ways to fund discounts even as they continue to offer discounts on a daily basis right now.

Apart from the regulation related to discounts, Flipkart and Amazon are also affected by the seller-related law.

Flipkart’s largest seller WS Retail Services Pvt. Ltd generates more than 25% of the company’s sales; Flipkart’s unit, Myntra, sells products directly to customers through its entity Vector E-commerce.

Cloudtail India Pvt. Ltd, a joint venture between Amazon.com Inc. and N.R. Narayana Murthy’s Catamaran Ventures, is now the key growth driver for Amazon India, generating at least 40% of the company’s sales in some months in key product categories, Mint reported on 29 October. Cloudtail is particularly dominant in electronics and fashion sales, two of the three largest categories for Amazon India (promoted by Amazon Seller Services Pvt. Ltd).

Given the new regulations, Flipkart, Myntra and Amazon India may have to set up new seller entities on their platforms.

“E-commerce marketplaces are trying to understand their position with DIPP (department of industrial policy and promotion). They want to take a safe position for now and eventually emerge with mechanisms where they can provide incentives to the customers. Days of discounting are not over but these firms are definitely vetting out their legal positions when it comes to discounts," said Angshuman Bhattacharya, managing director at consultancy firm Alvarez & Marsal India.

shrutika.v@livemint.com

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