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Nykaa cautions ahead of IPO: Draft e-commerce rules could increase costs, affect operations

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Nykaa via its IPO is looking to raise Rs 525 crore through a fresh issue of shares and investors will also sell over 4.3 crore equity shares as part of the Offer for Sale. In its DRHP, the beauty and fashion commerce company has said that changing regulations in India could lead to "new compliance requirements that are uncertain".

Nykaa cautions ahead of IPO: Draft e-commerce rules could increase costs, affect operations
The e-commerce rules, the draft for which was released in June for industry feedback, could impact Nykaa's operations and increase costs, the company has said in its draft red herring prospectus (DRHP) filed with the regulator.
The company is looking to raise Rs 525 crore through a fresh issue of shares and investors will also sell over 4.3 crore equity shares as part of the Offer for Sale.
As part of the Risk Factors, the beauty and fashion commerce company has said that changing regulations in India could lead to "new compliance requirements that are uncertain."
The company also specifically cited the draft e-commerce rules that the Consumer Affairs Ministry published in June, which seek to restrict flash sales, restrict the sale of private labels and brands on the e-commerce platforms, introduces a “fallback liability” on the e-commerce entities, expands the scope of the definition of “e-commerce entity” to include related parties, and also calls for the appointment of a chief compliance officer, nodal contact persons and resident grievance officers.
The draft rules "generally expand the scope of duties and liabilities of marketplace and inventory e-commerce entities," Nykaa said.
"There is no assurance that the final proposal will be similar to this or have other changes which may be challenging for us to implement. Such and other new compliance requirements could substantially increase our costs or otherwise adversely affect our business, financial condition, cash flows and results of operations. Further, the manner in which new requirements will be enforced or interpreted can lead to uncertainty in our operations, require significant changes in technology solutions and could also adversely affect our operations," the company has said.
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Similar concerns have also been raised by industry associations such as IAMAI and Indiatech, which sent their feedback to the government on the draft rules last month, highlighting concerns over the feasibility of some of the proposals as well as an overlap with existing regulations.
Amazon's director for Prime in India Akshay Sahi also told CNBC-TV18 last week that the rules could be detrimental to sellers on e-commerce platforms, and that Amazon had conveyed the same as part of the feedback to the government.
Among the risk factors from regulatory changes, Nykaa has also cited the Cosmetic Rules, 2020, which introduced registration requirements for cosmetics as well as introduced new requirements in relation to the declaration of ingredients, testing and voluntary recall for manufactured and imported cosmetics brands.
Additionally, under the amendments made to the Legal Metrology (Packaged Commodities) Rules, 2011, e-commerce entities are now required to display “country of origin” on all imported products along with other details like address of importer and date of expiry on the online platform and have to ensure that labelling information is declared as prescribed.
"Due to the large scale listing of products, there is a risk of potential gaps in the required disclosure caused by incomplete/incorrect information from vendors/ sellers or on account of an interim technical glitch. Further, as Nykaa uploads the product information or the promotional content on its platform on the basis of information received from brands, vendors, influencers, etc., this may dilute the protection as an intermediary under the IT Act," the company said.
Nykaa also cited the tax collection at the source of a percent for e-commerce sellers as a risk factor.
"Supplies on an e-commerce platform for marketplace transactions and B2B transactions are subject to deduction of tax collected at source (“TCS”) at the rate of a percent under applicable laws in case of supplies made by the seller through an e-commerce platform and the consideration is collected by the e-commerce operator. Further, GST regulations have mandated QR codes for customer B2C sales. Certain changes to the GST rate or rules and regulations surrounding GST and the related uncertainties with respect to the implementation of GST may have an adverse effect on our business, financial condition and results of operations," the company said.