The Flipkart office in Bangalore. Photo: AFP

India’s new electronic commerce investment rules have jolted market leaders Flipkart and Amazon, which are scrambling to restructure their business models after being forced to remove a large number of products from online sale lists.

Effective from February 1, the changes resulted from intense lobbying by small businesses, which are struggling to match the deep discounts and predatory competition unleashed by online retailers. Amazon and Flipkart, which together control 70% of the country’s online shopping market, had pushed for a postponement, but the government opted not to antagonize the domestic traders.

The e-commerce rules aim to curb marketing practices such as offering steep discounts and striking deals with sellers to sell exclusively on their platforms. They also prevent these platforms from selling products distributed by companies in which they have invested.

Walmart-owned Flipkart and Amazon were caught off-guard, as they have been employing some of these business practices for years. More than half of the sales on their platforms come either through captive sellers or indirectly from their wholesale units.

Seattle-based Amazon is looking to convert Cloudtail and Appario, the two most prominent sellers on its platform, into wholesale entities. Cloudtail and Appario will then sell to a battery of third-party vendors that will undertake final sales to consumers. Amazon, which holds a 49% stake in both, is currently in the process of identifying such sellers, the Economic Times reported.

Cloudtail and Appario were taken off Amazon when the new rules came into effect, while Amazon Pantry — a grocery service primarily managed by company affiliates — was discontinued. Amazon also delisted products sold by Shoppers Stop, in which it has a stake.

Flipkart is better-placed to adjust to the new regime, as its wholesale arm Flipkart India purchases goods from manufacturers and sells to preferred vendors, which make the final sale to consumers. In addition, the company has no stake in these preferred sellers.

But Flipkart will lose its monopoly on sales of Xiaomi products; similarly, Amazon will have to forego its exclusive right to sell OnePlus phones. Local traders and offline retailers will finally gain access to the popular brands.

Industry observers say that online sellers may now try workarounds, including approaching sellers who have a large offline presence. Some of these firms will agree to sell products on behalf of online retailers for a small margin without any equity ownership.

Large retail chain operators, including Mukesh Ambani’s Reliance Retail, should benefit from the new rules, as the ban on heavy online discounting is likely to boost their sales. Reliance will also gain as it prepares to enter the e-commerce sector, as the firm will not have to burn cash by offering large discounts to fight Amazon and Flipkart.

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