Amazon has a 24 percent stake in Cloudtail, which has reportedly enabled the e-commerce giant to bypass India’s FDI regulations so far.

Amazon and Catamaran have decided to end their seven-year joint venture partnership with Prione Business Services, the owner of Cloudtail, the e-commerce giant said in a statement on Aug. 9. The joint venture will continue to operate until the end of its current term of office on May 19, 2022.

That surprise announcement came hours after the Supreme Court refused to halt the Indian Competition Commission’s investigation into Amazon and Flipkart.

Why is it important? Cloudtail has been the focus of many allegations made against Amazon, with retailers complaining that the seller makes the majority of sales on the platform and is given preferential treatment by Amazon. The decision to end this joint venture has far-reaching implications for the e-commerce industry as well as offline retail.

What led to this decision?

Both Amazon and Catamaran didn’t say why they decided to end their partnership.

“The silence on the exact reason for the dissolution of Prione on both sides – Amazon and Catamaran – has left enormous room for speculation. However, the decision, which comes on the same day the Supreme Court nods at an IHK investigation into suspected anti-competitive practices by the former (and flip carts), cannot be a coincidence, ”said Nikhil Varma, Managing Partner, Miglani Varma & Co told MediaNama .

“Amazon has repeatedly come under fire for preferred providers and online discounts, allegedly violating India’s competition laws. With the introduction of consumer protection (e-commerce) regulations in 2020, the allegations have only gotten worse and the rules even stricter. With all of this it is not surprising that the joint venture is coming to an end as both companies will try to do so and avoid trouble with the Chamber of Industry and Commerce, ”added Varma.

How big is Cloudtail?

ON Reuters investigation announced in February that Cloudtail and Appario account for nearly 35 percent of sales on Amazon and a total of 35 of the more than 4,000,000 Amazon sellers in India account for two-thirds of sales on the platform.

The investigation, which was based on internal documents from the e-commerce company, also found that Cloudtail was referred to as “SM” or “Special Merchant” even though Amazon publicly claimed that Cloudtail received the same privileges as the other sellers on the platform.

Amazon’s internal documents contradict these claims and show how the e-commerce giant has helped a small number of sellers thrive, granted them discounted fees, and helped them get special deals with big technology makers like Apple Inc. The documents also show that the company has exercised significant control over the inventory of some of the largest sellers on Amazon.in. ”- Reuters

What are the allegations against Cloudtail?

Stationary retailers and smaller online sellers, represented by organizations like the Confederation of All India Traders (CAIT), Delhi Vyapar Mahasangh (DVM), and Swadeshi Jagaran Manch (SJM), have long claimed that the Amazon platform is mostly some big ones This will benefit sellers who are involved in the business.

The All India Online Vendors Association (AIOVA), a union that represents online sellers, filed an antitrust lawsuit against Amazon India in August 2020 alleging that some sellers were given preferential treatment and crowded out prices. According to AIOVA’s complaint, the agency alleged that Amazon India buys goods in bulk from manufacturers and then sells them at a loss to sellers like Cloudtail, who then sell the same goods at greatly reduced prices on Amazon. The group also claimed that Cloudtail pays Amazon a fee of just over 6% compared to the 28% that smaller sellers have to pay.

The Amazon and Flipkart CCI investigation was ordered due to many such complaints and aims to investigate four alleged violations:

  1. Exclusive introduction of mobile phones
  2. Promote preferred sellers on their websites
  3. Deep discounting practices
  4. Prioritize some seller offers over others

A brief history of Cloudtail

In 2014, Infosys founder Narayana Murthy’s and Amazon’s Catamaran Ventures entered into a 51:49 joint venture to form Prione Business Services. Cloudtail was founded as a wholly owned subsidiary of Prione. India’s FDI rules don’t allow marketplaces like Amazon to hold inventory and sell directly on the platform, but the rules allow Amazon’s wholesale units to sell to sellers. This enabled Cloudtail to buy from Amazon’s wholesale unit and sell to customers on the platform, leading to allegations that Amazon was abusing FDI rules by selling indirectly on its platform.

Sensing an abuse of FDI rules, the Indian government changed the rules in 2016 to state that an e-commerce marketplace cannot get more than 25 percent of its total sales from a single vendor, who at the time was Cloudtail supposed to do. To get around this, Amazon started another company like Cloudtail called Appario Retail. This was a 51:48 partnership between the Patni Group and Amazon.

Two years later, in 2018, the Indian government tightened the noose that no group company of a marketplace can be a provider on this marketplace. Cloudtail and Appario were group companies due to Amazon’s 49 percent and 48 percent stake, respectively. This modification essentially meant that Cloudtail and Appario could no longer sell on Amazon. After a short time in which the listings of the two sellers were deleted, Amazon cautiously resolved this problem by reducing its stake in Cloudtail and Appario to 24 percent each and they were no longer classified as a group company.

Could the proposed changes to e-commerce rules have been a catalyst for this move?

The Indian government proposed changes on June 21st that will give the existing consumer protection (e-commerce) rules more teeth in 2020. The proposed changes included new rules to combat abuse of FDI regulations. In the rules, “related parties” and “affiliated companies” were defined and it was established that

Affiliated parties and affiliated companies:

  • Can’t be a seller: None of the platform’s related parties and affiliates can be used as sellers for direct sales to consumers.
  • Can’t get an unfair advantage: The information collected by the platform cannot be used to create an unfair advantage on its related parties and affiliates.
  • Can’t do what the platform can’t: Platforms also need to ensure that nothing is done by related parties or affiliates that the e-commerce company cannot do itself.

If these proposed changes are implemented, it would prevent sellers like Cloudtail from selling on Amazon, but Amazon’s announcement prevents such a situation. Nonetheless, there are other such vendors, for example Appario, who are affected by the rules if they go through.

How will this move affect the e-commerce space?

“The partnership between Amazon and Catamaran has transformed the e-commerce ecosystem in India, creating job opportunities and opening up new market horizons for customers,” Siddharth Jain, co-founder of PSL Advocates & Solicitors told MediaNama.

Cloudtail is the largest and most popular across multiple categories such as smartphones, electronics, everyday necessities, and fashion. It is unknown who is filling this void and how it will be filled, and whether consumers will be affected by the lack of choice and reduced discounts as a result of the termination of this partnership.

“The end of the joint venture would be a stumbling block indeed, but given the strength it has brought to market over the years since its inception, it would be temporary and it wouldn’t take long for the wrinkles to be ironed out and the Things are back on track, ”added Jain.

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