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By Newley Purnell 

NEW DELHI-- India proposed new rules for foreign e-commerce firms, the country's latest move to reign in large American tech companies that dominate the country's budding internet economy.

The draft national e-commerce policy is a challenge to Amazon.com Inc. and Walmart Inc. as they spend billions to expand in the world's largest untapped tech market.

As hundreds of millions of Indians get online for the first time--and with national elections due in the coming months--policy makers have increased pressure on American firms and tweaked regulations to favor domestic players, hoping to match China's success at promoting its own homegrown tech companies.

The proposed e-commerce rules, released late Saturday, include an emphasis on data localization, calling for the establishment of more local data centers and server farms. Multinational e-commerce firms typically use computing resources all over the world.

"India's data should be used for the country's development." the draft says. "Indian citizens and companies should get the economic benefits from the monetization of data."

To house data locally, U.S. firms might need to spend more money to use local data centers and change their processes, possibly disrupting their operations, analysts say. Companies would be given three years to comply with the requirement, according to the draft.

Local data-storage rules in China forced Apple Inc. last year to begin shifting iCloud accounts of China-based customers to a local partner's servers.

India's draft rules also stipulate that all e-commerce websites and apps available in India must have a "registered business entity" in the country. Amazon and Walmart's Flipkart--the Indian e-commerce startup it acquired for $16 billion last year--have had local business operations registered for years, but the rule could be a challenge to smaller online sellers from the U.S. and elsewhere.

"A handful of companies today dominate the digital economy," the draft says. "They are successfully exploiting the significant first mover's advantage in the data-driven ecosystem. Once a certain scale is reached, it becomes virtually impossible for the 'second mover,' on its own, to make an entry in this ecosystem."

An earlier draft of the rules began circulating last year. Companies are invited to provide feedback to the draft rules to India's Department for Promotion of Industry and Internal Trade, until March 3.

"We are currently studying the draft policy and we will provide our inputs during the public review period," an Amazon spokeswoman said.

"We appreciate the government seeking consultation on the draft e-commerce policy," a Flipkart spokesman said. "We are going through the draft, which has been just released for comments and will be sharing our inputs in due course."

Separately, India tightened restrictions in late December by saying foreign retailers weren't allowed to sell online through affiliated local companies. They had used that practice to comply with rules forbidding them from holding their own inventory and shipping it out to consumers.

Meanwhile, India's telecommunications regulator is considering new rules that could force Facebook Inc.'s WhatsApp and others to let officials access encrypted messages between users on national security grounds. That could undermine the service's growth in the South Asian nation--its biggest market by users--and damage its global reputation as a secure service, if it complies.

In addition, India's Information Technology Ministry has proposed new intermediary guidelines that could affect Facebook, WhatsApp and Twitter Inc. by forcing them to more closely monitor material to respond to government requests regarding objectionable content more quickly.

Write to Newley Purnell at newley.purnell@wsj.com

(END) Dow Jones Newswires

February 24, 2019 03:39 ET (08:39 GMT)

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