Amazon and Walmart-owned Flipkart will suffer a big blow as the government has barred them from selling their own goods while also putting an end to deep discounts and cashback schemes offered by them.

The government’s move comes after local traders complained that they were being put out of business because of steep discounts these e-commerce companies offered.

The government also banned the online retailers from entering into exclusive deals to promote brands. This means, Xiaomi will not be able to sell its Mi phones exclusively on Flipkart, a practice typically adopted at the time of a product launch.

Besides, e-commerce companies will now have to furnish a certificate along with a report of statutory auditor to the Reserve Bank of India (RBI), confirming compliance of these guidelines, by September 30 of every year for the preceding financial year, indicating that the violations will be strictly dealt with.

The changes have been made to provide clarity to Foreign Direct Investment (FDI) policy on e-commerce sector and will be applicable from February 1, 2019, Department of Industrial Policy and Promotion (DIPP) said in a statement.

According to the new rules, ‘inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25 percent of purchases of such vendor are from the marketplace entity or its group companies’.

“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 marketplace entity,” the DIPP said.

This means that a seller has some stake in the e-commerce entity or its group companies or its sales amount to more than a fourth of total sales from a single seller (on the e-commerce portal) will not be allowed to sell its products on the platform.

“In light of the deeming fiction, any sale beyond 25 percent from a single vendor will automatically be treated as inventory and thus be barred,” Atul Pandey, Partner, Khaitan & Co said.

The government has also clarified that cash back discounts provided by e-commerce companies should be ‘fair and non-discriminatory’.

At present, online retail firms such as Amazon, Flipkart, Snapdeal, among others, follow a marketplace model, wherein they merely help sellers and buyers connect with each other by providing a technology platform.

In 2016, much to the ire of the offline traders, the government had allowed 100 percent foreign direct investment (FDI) in e-commerce firms following a marketplace model.

Under this rule, e-commerce firms looking for capital from foreign investors cannot have an inventory model. This means they cannot stock goods or services and then sell it to buyers coming to their website.

As per the FDI policy, 100 percent foreign direct investment is allowed in business to business (B2B) e-commerce, but not in business to consumer (B2C) commerce.

Under the rules, large online retail firms were classified as B2B because they were earning commission from the vendors who sold goods and services on their platforms.

The development comes at a time when the government is also working on a comprehensive e-commerce policy.

In July, it came up with the first leg of the draft e-commerce policy, which talked about allowing e-commerce companies that have FDI of up to 49 percent to switch from a marketplace model to an inventory-led model.

The idea was to promote the sale of domestically-produced goods on online platforms under the government’s 'Make in India' initiative by allowing B2C online retail companies to keep limited inventory.

However, offline traders did not take to the proposal kindly and criticised it for acting as a backdoor entry for FDI in B2C retail.