MUMBAI (Reuters) – India late last year modified foreign direct investment (FDI) rules for its burgeoning e-commerce sector that has attracted Walmart Inc and Amazon.com Inc, creating new hurdles for both global retail giants.

As a result, both Walmart-owned Flipkart and Amazon are scrambling to reconfigure ownership structures and re-jig some key vendor relationships and agreements before the rules come into effect on Friday.

What is the issue?

At the heart of the problem is India’s view on the two e-commerce models that exist today: marketplace and inventory.

* India allows 100 percent foreign direct investment (FDI) in the marketplace model of e-commerce, which it defines as a tech platform that connects buyers and sellers.

* India has not allowed FDI in inventory-driven models of e-commerce. The inventory model, which Walmart and Amazon use in the United States, is where the goods and services are owned by an e-commerce firm that sells directly to retail customers.

* The restriction is aimed largely at protecting India’s vast unorganized retail sector that does not have the clout to purchase at scale and offer big discounts.

* It means that Amazon and Flipkart can only operate the marketplace model in India. Both companies have wholesale units that bulk purchase goods and sell them to vendors listed on their platform. These vendors in turn sell to retail customers.

What are the restrictions on controlling inventory?

* Existing regulations state that e-commerce firms cannot exercise ownership over the goods sold on their online marketplace.

* Both Amazon and Flipkart developed complicated seller structures that helped them comply with the inventory control rule while exercising some level of control over inventory.

* Traders and small online sellers have accused Amazon and Flipkart of violating the spirit of the law and of using the structures to offer deep discounts, accusations they deny.

* The new rules state that the inventory of a seller or vendor will be seen as being controlled by a marketplace if the vendor purchases more than 25 percent of its inventory from the marketplace, or any of its group firms.

* The rule would not allow sellers on Flipkart and Amazon to make bulk purchases from the wholesale units of the companies.

* The new regulation replaces a rule that said an e-commerce firm could not permit one vendor’s retail sales to overshoot 25 percent of the overall sales of the marketplace by value in a fiscal year.

What are the equity interest restrictions?

* The rules now bar any entity in which an e-commerce firm or its group companies have a stake from selling on their online platform.

* This is a problem for Amazon, which had been picking up stakes in offline Indian retailers to boost its market share.

* The U.S. company’s investment arm owns a 5 percent stake in Indian department store chain Shopper’s Stop. Through an investment vehicle it also picked up a stake in the More retail chain. Amazon also owns a minority stake in the parent companies of Cloudtail and Appario, even though it does not have a direct stake on either of the two sellers.

What are the other rules?

* The government has also prohibited e-commerce firms from pushing merchants to sell any product exclusively on its platform. The sellers can, however, choose to have a preferred online partner.

* Amazon and Flipkart launch products such as smartphones exclusively on their online portals and apps. While such arrangements may continue, e-commerce firms are unlikely to use the word “exclusive” anymore and will likely re-negotiate contracts to give brands more freedom to sell elsewhere.

* The new rules also stipulate that an e-commerce marketplace, as well as any companies the marketplace has equity stakes in, should provide services such as fulfilment, logistics and payments to all sellers on the platform in a fair manner.

* Providing such services to one seller and not to others in similar circumstances would be deemed as unfair and discriminatory, according to the rules.