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Commuters sit at a bus stop in Bengaluru, India, with ads for Indian online marketplace Snapdeal, which recently raised $200-million (U.S.) in a funding round led by the Ontario Teachers’ Pension Plan.

Abhishek Chinnappa/Reuters

The foot soldiers of India's e-commerce revolution zip around its cities on scooters and motorcycles, delivering clothes, gadgets and other goods to consumers who often pay in cash on delivery because they don't have credit cards – or even, in some cases, bank accounts. In the course of their work, deliverymen have reportedly been beaten up and locked in bathrooms over disputes with angry customers, while others have been full-on robbed.

Perhaps the most surprising thing about this chaotic enterprise is that the companies are thriving – and are being funded by billions of dollars from big foreign investors, including a Canadian pension fund.

Until now these foreign funds flowed in under unclear conditions. But last month, India's government moved to clarify the rules and ease foreign direct investment restrictions in the country's booming e-commerce sector. The move grants legitimacy and certainty to a bright spot in the new Indian economy.

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The online marketplace Snapdeal, which recently raised $200-million (U.S.) in a funding round led by the Ontario Teachers' Pension Plan, is now valued at roughly $6.5-billion. Its rival Flipkart has been valued as high as $15-billion. Foreign contenders, such as Amazon and Alibaba, have also rushed into the market. And Morgan Stanley has said Indian e-commerce could be worth as much as $137-billion by 2020, while Goldman Sachs suggests it will total $300-billion by 2030.

But the new "guidelines," which came from the Department of Industrial Policy and Promotion, will not benefit all players equally – and might set back some foreign firms such as Amazon, which has invested $2-billion in the country.

While the government of Prime Minister Narendra Modi has lifted foreign investment restrictions in other sensitive sectors, such as in military and defence manufacturing, up to a 49-per-cent threshold, the new rules for e-commerce go further. The government is allowing up to 100 per cent foreign direct investment in business-to-business e-commerce firms, as well as those pursuing a pure marketplace-based model that simply connects buyers and sellers.

But the government will not allow foreign direct investment (FDI) in business-to-consumer e-commerce or firms using an inventory-based model that ships goods from a central location – which is mostly how Amazon operates in the United States and has reportedly lobbied for in India. The department did make a number of exceptions to this ban – for example, for companies selling goods manufactured in India or a trading company that already operates brick and mortar stores. The department also added some restrictions on e-commerce firms that receive FDI, limiting individual vendors on the platform to less than 25 per cent of a firm's total e-commerce sales. But the main divide is clearly between marketplace and inventory types of e-commerce.

Snapdeal's CEO Kunal Bahl enthusiastically tweeted his support of the new regulations: "Always a great feeling when you stick to the course that you believe in, [and it] pays off: Focusing on a pure marketplace and not doing inventory," he wrote. Amazon, which has reportedly lobbied in support of an inventory model, and Flipkart, which started with an inventory model before diversifying to a hybrid approach, were both "deafeningly silent" after the government's announcement, according to Indian business daily Economic Times. Both Flipkart and Amazon also have subsidiaries and joint-ventures that sell in volumes that are likely way beyond the 25-per-cent threshold for any individual vendor on the platform. (Amazon's Cloudtail India is reported to account for as much as 40 per cent of sales.)

The government's political hesitation reflects the immense risk that comes with reforms that touch on India's massive retailing sector, which is second only to agriculture in terms of overall employment. India is, after all, a nation with tens of millions of small shopkeepers, many of whom are in a precarious economic position – and often protest noisily at any indication the government will cave to big multinationals like Wal-Mart, Carrefour and Ikea. Because of this, there are onerous regulations restricting some companies to wholesale (selling to shopkeepers, which Wal-Mart does) or restricting global companies to local Indian suppliers and manufacturers (which is confounding Ikea).

E-commerce, to some Indian shopkeepers, is pretty much the same – a newfangled threat that allows people to bypass the old mom-and-pop shops. But these retailers are far from just irrelevant old-timers: They are also a powerful political constituency that cuts across the religious, caste and geographic lines that define Indian politics. The Indian political party that messes with shopkeepers is one that is not long for this Earth.

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And that's why these new rules work, and why Mr. Modi's administration seems to be scoring an easy win. It moved to legitimize FDI inflows that were already occurring, while signalling to the masses of shopkeepers that they were taking a firm stand. The guidelines give certainty to e-commerce companies as they grow and will ensure their numerous foreign backers – such as Teachers', Japan's SoftBank and BlackRock – that the government will let the sector flourish, like the business process outsourcing (BPO) industry before it.

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