NEW DELHI—India is tightening restrictions on foreign e-commerce companies operating in the country, a new challenge to Amazon.com Inc . AMZN 9.45% and Walmart Inc. WMT 5.35% as they bet billions on the nascent market.
Current rules forbid non-Indian online sellers from holding their own inventory and shipping it out to consumers, as is typically done in other countries. Instead, they have found a work-around by operating as online marketplaces and selling what are effectively their own products held by their affiliated local companies.
They will no longer be allowed to sell such goods, a division of India’s Commerce and Industry Ministry said in a statement Wednesday, an apparent attempt to close that loophole.
The new rules, which take effect Feb. 1, also bar foreign companies from entering into exclusive agreements with sellers. Amazon, for example, has in the past been the exclusive third-party online retailer to sell smartphones from the popular Chinese smartphone brand OnePlus.
Amazon founder Jeff Bezos has pledged $5 billion to expand its India operations, and the Seattle retailer has become a leading online seller in India since its 2013 launch. In May, Walmart bought Flipkart Group, India’s biggest homegrown e-commerce firm, for $16 billion,
“It’s going to be tough for Amazon and Flipkart,” said Satish Meena, an analyst at Forrester, noting that elements of the new rules remain unclear. “They have invested a lot of money based on policies that were in place, and now you’re suddenly changing them,” he said.
An Amazon spokeswoman said the company is evaluating the guidelines, as did a Flipkart spokeswoman. A spokesman for Walmart in India referred questions to Walmart representatives in the U.S., who didn’t immediately respond to a request for comment.
While India’s dominant online shopping companies are foreign owned, some up-and-coming players could benefit from a change in rules, analysts say.
A post from the Twitter account of Kunal Bahl, chief executive of a smaller Indian e-commerce firm, Snapdeal, praised the government’s move. “These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce,” he wrote.
Another beneficiary could be Reliance Jio, the upstart telecommunications firm run by India’s richest man that has shelled out billions of dollars to build the country’s first all-4G network. Analysts say it could be aiming to move into e-commerce in the coming years.
With masses of local consumers getting online via low-cost data and smartphones, India’s e-commerce market is set to boom, rising to about $72 billion in 2022 from about $33 billion this year, according to research firm eMarketer.
“It’s one of the best news after a long, long time,” said Kishore Biyani, chief executive of Future Group, which has retail stores in 250 cities across India.
Since reading the policy announced Wednesday, “We have been thinking how can we be the Amazon of India, and how can we be the Alibaba of India, rather than some international company building presence in India,” he said.
Mr. Biyani said his company had talked about partnerships with Amazon but that with the protection of the new regulations, it could build its own businesses.
Indian policy makers have been looking for ways to tamp down American tech behemoths’ power. With Alphabet Inc.’s Google, and Facebook Inc. and its WhatsApp messaging service used by hundreds of millions of Indians, India is examining methods China has used to protect domestic startups and take control of citizens’ data.
Governing officials want to foster the development of the India’s own world-beating tech companies, analysts say. They see how China’s restrictive policies have helped it create some of the world’s biggest and most innovative tech brands, such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd.
A spokeswoman for India’s Commerce and Industry Ministry didn’t immediately respond to a request for comment.
Abneesh Roy, an analyst at Edelweiss Securities, noted that ahead of elections set for early next year, the government could be moving to appease owners of smaller shops that have been hit as customers buy more goods online.
“Shopkeepers have been unhappy,” he said. “In an election year, the government will definitely listen more to voters.”
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Write to Newley Purnell at newley.purnell @wsj.com and Corinne Abrams at corinne.abrams@wsj.com
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