Bengaluru/New Delhi: The government on Wednesday barred online retailers such as Flipkart and Amazon from selling products of companies in which they own stakes and disallowed them from entering into exclusive deals for merchandise, unveiling norms that industry figures warned could upend India’s $18 billion e-commerce industry.

Barring e-commerce marketplaces from selling products of firms in which they own stakes could hit Amazon in particular, given that it has several such joint ventures, including Cloudtail and Appario. Cloudtail is a joint venture between Amazon and N.R. Narayana Murthy’s Catamaran Ventures.

The commerce and industry ministry’s decision to introduce the new norms follows complaints by small traders, who contend that deep discounts offered by the likes of Amazon and Flipkart are driving them out of business. The issue is of crucial importance for the government, given that national elections are due by May and traders are a core voter base for the ruling Bharatiya Janata Party.

The move to ban exclusive deals for products also hurts top online retailers such as Flipkart and Amazon. Flipkart, for instance, has exclusive partnerships with top smartphone brands such as Xiaomi and Oppo. Smartphones contribute over 50% of overall e-commerce sales in India.

E-commerce companies have to go back to the drawing board and see if their business models comply with the new requirements that are effective prospectively from 1 February, said Anil Talreja, partner, Deloitte India.

A senior government official said the changes in the foreign direct investment policy (FDI) on e-commerce were aimed at tackling “anti-competitive" behaviour by e-commerce entities.

“There is a wrongful subsidization of products by e-commerce players. In the marketplace model, the e-commerce entity should be neutral to all vendors," said the official, who spoke on condition of anonymity. Another official said the government would address queries related to the new norms either on Thursday or Friday.

The announcement of the policy evoked massive protests from executives of top e-commerce companies, who warned of a swift pushback. Top executives from both Flipkart and Amazon said they would lobby strongly to either have the new policy scrapped in its entirety or to have significant amendments made to it in order to ensure “minimum disruption to Indian e-commerce".

Executives from both companies also claimed they were not consulted before the policy was issued by the government and that there had been no dialogue with commerce and industry minister Suresh Prabhu on this matter.

“This policy makes no sense and is utterly ridiculous. The way this new policy has been crafted shows a complete lack of understanding of the retail landscape in India and how it functions. We were not even consulted before this was issued," said a top executive at Amazon, who requested anonymity.

Publicly, large e-commerce firms said little.

Flipkart did not immediately respond to a request for comment. “We are evaluating the circular," said an Amazon spokesperson.

Most large e-commerce firms previously exploited loopholes in existing FDI rules and created complex structures to get around the norms. For instance, when the government put rules in place that restricted large sellers on platforms such as Flipkart and Amazon from contributing more than 25% of sales, online retailers set up complex structures to get around those loopholes by mandating other sellers to buy from those large sellers and then in turn sell those products on online marketplaces. In other instances, large sellers formed multiple entities, which sold their products separately on online marketplaces.

The latest policy is aimed at plugging those loopholes.

Surprisingly, Kunal Bahl, co-founder of Snapdeal, welcomed the new policy.

“Snapdeal welcomes updates to FDI policy on e-commerce. 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," Bahl said on Twitter on Wednesday evening.

The new FDI norms, however, may not be in sync with the spirit of competition and free market economy. Only those exclusive arrangements that have an appreciable adverse effect on competition are prohibited under the Competition Act, said Subodh Prasad Deo, partner at law firm Saikrishna and Associates, and former additional director general at Competition Commission of India.

One of the factors that will help in making that assessment is whether such exclusive arrangements create entry barriers to new entrants in the market.

“I’m expecting almost all e-commerce firms with marketplace models to relook their current structures and models. Overall, we will see a lot of introspection by the marketplaces on their current business models to comply with the new policy and a lot more work for the statutory auditors," said Sreedhar Prasad, a former partner at KPMG, who recently joined Kalaari Capital as a partner.

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