Case Study: India$$s Ecommerce Crackdown Upends Big Foreign Players$90$ Saifuddin Bhanpurawala is one of dozens of shopkeepers on a dusty Mumbai back street that bustles with customers buying everything from tobacco to perfume. But Mr Bhanpurawala$$s mobile phone shop is going through hard times, selling as few as two handsets in a bad week. He says the reason is obvious: the huge discounts available online at Amazon and Walmart$-$owned Flipkart, the two biggest players in India$$s fast$-$growing ecommerce sector. $$If we sell something at Rs$5,000[$$$70],$ they might sell it at Rs$2,500$ we don$$t understand how it$$s possible,$$ said Mr Bhanpurawala, $28.$ He argued that the Indian government$$s tolerance of such practices has demonstrated its lack of concern for small businesses: $$The rich are getting richer and the poor are getting poorer.$$ With a general election just four months away, prime minister Narendra Modi is moving to address such complaints. Amazon and Flipkart have been given until the end of this month to comply with new restrictions, announced in late December, that sharply restrict the use of their hefty balance sheets to boost sales on their virtual marketplaces. But while the move is intended to strengthen the government$$s credentials among India$$s millions of small retailers, it has sparked alarm for two of the country$$s biggest outside investors. Walmart$$s $$16$bn buyout of Flipkart last year was the biggest foreign direct investment in Indian history, while Amazon has committed $$5$bn in capital to its Indian operation. $$A sudden change in rules is not helpful,$$ said Mukesh Aghi, president of the US$-$India Strategic Partnership Forum, which works to build economic ties between the countries. $$It sends a message to groups that the environment is not transparent.$$Behave like a marketplace$$ When India opened its economy to foreign capital in the $1990$s$,$ it was careful to maintain protection for small retailers. Foreign investment was allowed in single$-$brand but not multi$-$brand retail$$allowing clothing labels, for example, to open stores but keeping out the foreign supermarket chains that were feared by many shopkeepers. As ecommerce took off, New Delhi updated these rules for the internet age. Foreign$-$backed companies would be allowed to run virtual $$marketplaces$$platforms enabling independent sellers to connect with customers. But they were barred from selling goods themselves, stopping them from functioning as online supermarkets. The vague wording of the rules, however, meant that Amazon and Flipkart$$backed with billions in capital from foreign investors led by US fund Tiger Global$$quickly found ways to use their balance sheets to turbo$-$charge growth, outraging peers in the industry. $$We were flabbergasted all the while at the blatant violations of the FDI policy,$$ said Sanjay Sethi, chief executive of ShopClues, one of the largest rivals to the dominant duo. $$We started doubting ourselves$$are we not interpreting these rules correctly?$$ Partnering a fund controlled by Narayana Murthy, co$-$founder of IT services group Infosys, Amazon formed a joint venture that in turn owned Cloudtail India, a new company that would sell products ranging from electronics to breakfast cereal. Cloudtail is by far the biggest seller on Amazon$$s Indian marketplace, with revenue of $$1$bn in the last financial year ending March $2018.$ Flipkart pursued a different tack. Instead of forming directly controlled sellers, it supplied many of them through a huge wholesale distributor, named Flipkart India. The distributor$$s revenue has far outstripped that of the online marketplace entity, while incurring heavy losses. In the last financial year, Flipkart India made a net loss of $$293$m on sales of $$3$bn$.$ That dwarfed the revenue of Flipkart Internet, the marketplace business, which booked sales of $$398$m$,$ mostly on commissions charged to sellers. From $2016,$ Amazon also dramatically increased the scale of its wholesale operation. In the last financial year, that business had revenue of $$1\mathrm{.}7$bn$,$ up from $$458,000$ two years before. $$They would strike a large deal with a brand and buy in bulk,$$ claimed one rival ecommerce executive, alleging that the wholesaler would then supply the goods at low prices to certain $$controlled sellers$.$ The sellers would then offer the products on the marketplace at steep discounts from the prices available in offline shops. $$This was compliant with the letter of the law, but not the spirit,$$ the person said. But the new rules, announced in December $(2018),$ strike hard at such practices. They stipulate that no seller on foreign$-$funded online marketplaces can source more than $25$ per cent of its inventory from a wholesaler linked to the marketplace$$banning sellers set up to shuttle goods between the two. They also state that no entity may sell on these marketplaces if any of its equity is owned by the marketplace or by any of the latter$$s $$group companies$.$