The government has tightened norms for online retailers, making it more difficult for them to use their nearly endless stream of foreign capital to fund high discounts, a move aimed at assuaging offline traders, who form a key part of the ruling BJP’s core constituency.

A note issued by the Department of Industrial Policy & Promotion (DIPP) on December 26 said e-commerce entities, which operate a marketplace, will not be allowed to exercise ownership or control over inventory. Any ownership or control over the inventory will convert the business into an inventory-based model.

The rules further state that the inventory of a vendor will be deemed to be controlled by an e-commerce marketplace entity if more than 25 percent of the vendor’s purchases are made through the marketplace or its group entities. Any outright equity investment in the vendor will also bar the entity from selling on the marketplace.

Leading online players own or have invested in companies that procure goods in bulk from companies and sell them to their “preferred vendors”, which would list the same products at cheap prices.

The new rules mean that online marketplaces such as Amazon, Flipkart and Paytm, which are all funded by FDI, cannot exercise any control over their vendors or their pricing strategy.

An online marketplace is any e-commerce company that only serves as a platform for buyers and sellers to meet. FDI is not allowed in any inventory-based e-commerce company in India.

The previous rule for marketplaces said that they cannot generate more than 25 percent of their sales from any one seller – a law that e-commerce firms skirted around by empaneling a slew of preferred vendors. The model would allow e-tailers to exercise greater control on the pricing strategy and offer deep discounts.

While the government’s new norms are significant, they are unlikely to be foolproof.

In August, the government had issued a draft policy for e-commerce companies, which garnered criticism for offline retailers. The $20 billion online commerce industry is a fraction of India’s $700 billion offline retail sector.

Funded by foreign capital, e-commerce companies have been looking to corner market share with their aggressive pricing strategies – even at the cost of incurring deep losses.

However, offline retailers still remain unimpressed with the government's yearend move.

"Instead of investigating violations by particular companies, the government has whitewashed their past sins and formed a new policy. It will be years before government investigates or penalises them. Now this compliance is conveniently postponed to September 2019," said All India Online Vendors Association (AIOVA) in a statement.

E-commerce companies such as Snapdeal welcomed the move.

In a tweet, Kunal Bahl, co-founder and chief executive officer said, "Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce."