Prospect Theory
Prospect Theory is probably the most important piece of literature in behavioral finance. The conclusions made in prospect theory underlie a lot of aversions and biases, which have been discussed in different articles. Hence, in order to understand all those biases and the behavioral finance theory in general, it is important to understand what the […]
Dutch Auction
Book building has been one of the most widely used methods in the underwriting process. However, over the years, companies have realized that the book-building process is largely controlled by the intermediaries, i.e., the investment banks! The investment banks are the ones building the books. Hence, they can easily control who gets in and at […]
Pros and Cons of Neo Banks
In the previous article, we have already discussed what neo banks are. We now know the business model of neo banks. We are also aware of the various characteristic features of neo banks. It is important to note that a significant number of business organizations in Europe have already started migrating their banking needs to […]
Pros and Cons of Merchant Cash Advance
In the previous article, we understood what a merchant cash advance is. We also understood the two types of merchant cash advances that are available in the market. Even though merchant cash advance is considered to be a financial innovation by some people, it also has its fair share of critics. Hence, for a business, […]
Why is it Difficult to Raise Seed Funding?
In the previous article, we have already learned what seed funding is and the various sources from which it can be acquired. It is important to mention that theoretically seed funding can be obtained from various sources. However, in real life, it is remarkably hard to obtain. There are very few entrepreneurs who are able […]
The Indian government has been defensive about opening up its retail sector to global companies such as Wal-Mart and Amazon. This is the reason why the country only permits 100% foreign direct investment in single-brand retail. This means that companies like Levis or Benetton can own and operate stores because they only sell one single brand. On the other hand, supermarket chains sell multiple brands from the same store. As of now, the Indian government does not allow more than 49% foreign ownership in such ventures.
Over the past few years, tech giants have used the cover of technology to blur the lines between single and multi-brand retail. Companies like Flipkart and Amazon have been blatantly circumventing the law. In effect, Amazon and Flipkart have been running multi-brand retail stores with majority backing from a foreign financial company. Let’s have a closer look at the earlier structure which was being followed by e-commerce companies to understand this further.
Technically, Amazon and Flipkart act like marketplaces. This means that they claim to be companies like eBay which only provide a platform where buyers and sellers meet. It is true that Amazon and Flipkart do allow local retailers to enlist their products on their websites. However, these retailers account for a very small percentage of the total sales.
A large majority of the sales come from pass-through shell vendor companies which have been created by Amazon and Flipkart. For instance, Cloudtail sells a lot of products on Amazon. Technically cloudtail is an independent retail company whose office is registered in India. However, the reality was that Cloudtail was created only to circumvent the rules.
Hence, the wholesale arm of Amazon would directly sell to Cloudtail who would then sell to the Indian consumer. It doesn’t take a genius to figure out that the existence of Cloudtail is only an eyewash. In reality, Amazon is directly operating a multi-brand retail store in India by bending the rules.
After several protests by Indian retailers, the Indian government finally took cognizance of the illegality of this operation. In order to prevent this from happening, the Indian government created a rule that retailers like Cloudtail should not be allowed to buy from companies in which more than 25% of the inventory is controlled by the e-commerce firm itself. Hence, this rule was meant to break the proxy route using which Flipkart and Amazon were breaking the law.
The Indian government was of the opinion that new regulations would put an end to the potentially illegal operation that Amazon and Flipkart had been running. The Indian government wanted these e-commerce sites to truly become marketplaces where small and medium sellers can sell their products. If the supply chain of companies like Cloudtail is broken, the smaller buyers will become more competitive. Hence, the Indian government was only trying to look after the interests of its small scale industry.
However, Flipkart and Amazon have once again used their legal think-tank to find a way to outsmart the Indian government. It turns out that the 25% rule is not enough to stop these companies from bending the rules.
It is difficult to decipher such actions and put a meaning to them. On the one hand, there are critics who believe that these acts amount to breaking the law in spirit and hence must be punished. On the other hand, many believe that Flipkart and Amazon are being innovative and avoiding the unnecessary regulation and red-tape which is coming their way.
However, it is unlikely that the Indian government will take this lying down. Since this is an election year and small traders form a huge chunk of voters, it is likely that the government will crack down on this alpha-beta strategy.
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