Top Stories
Top Stories
Tech

If you hold Amazon shares, here's what you need to know about India's e-commerce law

Key Points
  • India is one of Amazon's most important markets. The company has already poured roughly $5 billion into the country and is reported to have plans for an additional $2 billion investment in Amazon India.
  • But new restrictions put on India's burgeoning e-commerce sector could potentially affect the way Amazon does business in the country.
  • The restrictions may compel companies such as Amazon to look for alternative business models and to reevaluate the sellers they work with at the moment.
  • But the overall impact of India's new rules on Amazon is "hardly ... earth shattering," analyst Michael Pachter said.
VIDEO2:0102:01
India's new e-commerce rules are 'political': CEO

New restrictions put on India's burgeoning e-commerce sector could potentially dent Amazon's business in the country.

India is an important growth market for the American e-commerce giant: Amazon has already poured roughly $5 billion into that market and is reported to have plans for an additional $2 billion investment in Amazon India. It has also been making inroads into the country's offline space, buying equity stakes of local retail chains such as More and Shoppers Stop.

India's e-commerce market will exceed $100 billion by 2022, with online retail and travel holding more than 90 percent share, according to global consultancy PwC.

Shares of Amazon fell on Friday as India's new e-commerce regulation came into effect, in part due to the company expressing concerns about "much uncertainty" in the country.

An Amazon India spokesperson said in a Tuesday statement to CNBC, "While we remain committed to complying with all laws and regulations, we will continue to look to engage with the government to seek clarifications that help us decide our future course of action as well as minimize the impact on our customers and sellers."

Now, Amazon is scrambling to reconfigure its business model, key partnerships and ownership structure to become compliant in India. Here's what you need to know about recent changes to the e-commerce market in the world's fastest growing major economy:

What is the law about?

Last December, the Indian government published a circular that effectively banned Amazon and its local competitor, Flipkart, from selling products of companies in which they have an equity stake.

The document said e-commerce firms could no longer form exclusive selling arrangements with sellers or offer steep discounts to consumers based on those deals. Foreign direct investments would only be allowed into e-commerce companies that provide marketplaces for buyers and sellers, according to the new rules.

Typically, e-commerce companies can make bulk purchases through their wholesale subsidiaries or other affiliates and then sell the products to preferred sellers they have agreements with, according to Reuters. In turn, those sellers can sell the products to consumers at low prices.

The new changes came into effect starting Feb. 1, following complaints from local Indian retailers and traders about anti-competitive practices from the likes of Amazon and Flipkart, which is owned by Walmart.

How may it affect Amazon?

Analysts told CNBC the new e-commerce rules will have a short term impact on Amazon as it will compel companies such as Amazon to look for alternative business models in the absence of leaning on firms in which they hold an equity stake.

"This will significantly impact the availability of products on these platforms in short term as these sellers account for minimum 45-50 (percent) of sales on these platforms," Satish Meena, a senior forecast analyst at Forrester, told CNBC by email. He added that Forrester predicts a minimum of 5 to 6 percent reduction in online sales for 2019 due to the policies.

On top of that, the government denied requests from Amazon and Flipkart to defer the implementation of the new rules to buy the companies more time to comply.

An employee of Amazon India walks toward a security gate at the company's newly launched fulfillment center on the outskirts of Bangalore.
Manjunath Kiran | AFP | Getty Images

With parliamentary elections set to be called by May, one analyst described the situation as political "posturing."

"The enforcement of the same (rules) is a different issue altogether and is dependent on how these companies interact with the policymakers, display intent and ... policymakers' willingness to seek a middle ground," Ankur Bisen, a senior vice president at Indian management consulting firm Technopak, told CNBC by email. He explained that the situation is expected to stabilize later in the year once the government issues more clarity on the changes.

As Amazon attempts to comply with the new rules, more than 400,000 items available on its Indian site could temporarily disappear, the New York Times reported last week. That would account for nearly a third of Amazon's estimated $6 billion in annual sales in India, the paper said.

On Wall Street, analysts mostly stuck by the internet juggernaut, tweaking estimates and lowering price targets slightly.

Is the impact going to be long term?

The overall impact of the new rules on Amazon is "hardly ... earth shattering," Michael Pachter, managing director of equity research at Wedbush Securities, told CNBC by email.

He cited estimates that the new restrictions would affect about a third of the goods Amazon sells in the country, so the company would only lose around $250 million in sales. Meanwhile, Amazon is expected to generate $280 billion in revenue this year, so that adds up to about 0.1 percent of its sales, Pachter said.

While investors have a legitimate near-term concern, Amazon's India play is "very much a long game," according to R.J. Hottovy, consumer equity strategist at Morningstar.

VIDEO3:3003:30
Here's why India is a huge threat for Amazon and Walmart

"We don't expect Amazon to post positive profits in the region for almost a decade, which won't change based on the new regulations," he told CNBC. "Over a longer horizon, I expect India to ease some of these restrictions if it results in companies like Amazon and Walmart funding infrastructure projects in the region."

Technopak's Bisen added that the rules would benefit local entities that are not owned by foreign firms as they are set to become more active in the e-commerce space. On the other hand, consumers who have long enjoyed a wide variety of products at low prices would lose out, analysts said.

Given the amount of money involved in the sector, the government could relax some of the regulations, Forrester's Meena added.

VIDEO4:5604:56
What is Flipkart?