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08 Aug 2016

FDI in E-Commerce – The Evolving Market

By: Anjali Haridas
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India is one of the fastest growing e-commerce markets in the world and much to the relief of the e-commerce business in India, the Department of Industrial Policy and Promotion (DIPP) has brought much needed clarity to the scope of Foreign Direct Investment (FDI) in e-commerce activities vide the Press Note No.3 of 2016 (“Press Note”) which was later incorporated into the Consolidated FDI Policy Circular of 2016 brought out by the Ministry of Commerce and Industry on 7th June, 2016 (“FDI Policy 2016”). Until the said Press Note, up to 100% FDI was permitted, under automatic route, in Business-to-Business (B2B) e-commerce. The said Press Note sets out guidelines for foreign investment in the e-commerce sector.

This write-up provides a glimpse of the conditions stipulated in the Press Note and other changes brought out by the Government.

 FDI in Indian E-Commerce: The Road So Far

 FDI in the e-commerce sector was first permitted in India in 2000 for purely B2B e-commerce with certain conditions attached[1]. Initially FDI up to 100% was permitted for E-commerce activities through automatic route, subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies were not permitted to enter in retail trading, inter alia, implying that the then existing restrictions on FDI in domestic trading were applicable to e-commerce as well. In other words, FDI was not permitted in B2C e-commerce.

Subsequently, the Government opened the retail sector to foreign investment, although the restriction with respect to Business-to-Consumer (B2C) e-commerce continued. Since 2000 and until the end of 2015, the rules governing foreign investment in trading sector (single brand, multi brand and wholesale trading) underwent innumerable changes. But all through, the Government continued with the restrictions placed on B2C e-commerce activity. In 2006[2], the Government dispensed with the requirement of mandatory divestment of 26% foreign equity in B2B e-Commerce. Later the Government defined ‘e-commerce activities’ to refer to the activity of buying and selling by a company through an e-commerce platform.

In 2014, the Government brought out a discussion paper on e-commerce which analyzed the existing regulatory regime on FDI in e-commerce sector in India and the requirement for liberalization in the B2C e-commerce segment. The Government further liberalized the foreign investment in retail trading, in November 2015[3], by permitting a single brand retail trading entity to operate and undertake e-commerce activities.

The Highlights of the Press Note and the Road Ahead

The said Press Note gives much impetus to the rather nascent e-commerce industry in India by giving a more elaborate definition for “e-commerce”. The term e-commerce has now been defined to mean buying and selling of goods and services including digital products over digital and electronic networks. Digital and electronic networks include networks of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc. It is to be noted that this definition is much broader than the earlier definition provided for e-commerce activity which only referred to the activity of buying and selling by a company through an e-commerce platform.

For the first time, the Press Note also defines the scope of an ‘e-commerce entity’ to cover Indian companies, foreign company and a branch, office or agency in India owned or controlled by person resident outside India and conducting e-commerce business. This definition for e-commerce entity provides an opportunity to foreign companies to invest into market place based e-commerce model. 

The FDI Policy 2016 also brings out, for the first time, the distinction between inventory-based model of e-commerce and marketplace based model of e-commerce[4]. A marketplace based model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller. In other words, the e-commerce entity is only a ‘facilitator’ or a ‘marketplace’ which facilitates the sale between the seller and the end-consumer. The e-commerce entity does not own the products/services sold. In an inventory based model of e-commerce, the inventory of goods and services is owned by the e-commerce entity and is sold to the consumers directly. That is, in inventory based e-commerce model, the e-commerce entity sells the goods/services to the end-consumer. While the said Press Note permits FDI up to 100% under automatic route in marketplace model of e-commerce, it prohibits FDI in an inventory based e-commerce.

FDI is permitted subject to the conditions listed in the Press Note. The marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on a B2B basis. The E-commerce marketplace is also permitted to provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection (in accordance with the applicable guidelines by RBI in this regard) etc. An e-commerce entity is not allowed to permit more than 25% of the sales to be affected through its marketplace from one vendor or their group companies. Further, e-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and is required to maintain a level playing field.

An e-commerce entity working on the marketplace model should not exercise any ownership over the inventory i.e. goods purported to be sold. If the entity has an ownership over the inventory, it will render the business into inventory based model. In marketplace model, goods/services made available for sale electronically on website should clearly provide name, address and other contact details of the seller. However, in a marketplace model, the post sales delivery of goods to customers, customer satisfaction as well as any warranty/ guarantee of goods and services sold will be responsibility of the seller.

Further, it is to be noted that wholesale trading would include B2B e-Commerce and the guidelines on cash and carry wholesale trading[5] will apply to B2B e-commerce as well. As such, the e-commerce entity on B2B e-commerce should comply with those guidelines including the requirement for applicable licensing/registration from the State Government/ Government Authority concerned, maintenance of records, extending credit facilities etc.

Though FDI is not expressly permitted in Business-to-Consumer (B2C) e-commerce, FDI in B2C e-commerce is permitted in the following circumstances:

  • A manufacturer is permitted to sell its products manufactured in India through e-commerce retail, without Government approval[6].
  • A single-brand retail trading entity operating through brick and mortar stores is permitted to undertake retail trading through e-commerce.[7]
  • An Indian manufacturer is permitted to sell its own single brand products through e-commerce retail. Indian manufacturer would be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, at most 30% from Indian manufacturers.[8]

It is to be noted that in case of companies with FDI which are engaged in the activity of multi-brand retail trading, retail trading by means of e-commerce is not permitted.

Conclusion

To sum up, the Press Note provides that in India, FDI within the B2B e-commerce segment is allowed. Whereas foreign investment in B2C e-commerce, though not specifically permitted, is allowed in limited circumstances, that is, Indian manufacturers and single brand retail trading entity can undertake B2C E-commerce activity.  The Press Note states that FDI is not allowed in case of an inventory led e-retailing model.  However, market-place based e-retailing model can still attract FDI. This will bring a lot of relief to existing business entities based on the marketplace model such as Flipkart, as it legitimizes their business structuring.

Though the e-commerce sector in India has seen tremendous growth in the past few years, the industry has been facing a financial crunch in the past seven to eight months. While on one hand the Press Note has brought legitimacy to the existing structure of E-commerce activities in India. On the other hand, it promises to provide better incentive to foreign investment by widening the definition of ‘e-commerce entity’. The changes brought by the said Press Note is definitely a welcome move, as it attempts to bring more clarity on the structure for e-commerce business in India and the industry would benefit from the same.

[1] Press Note No.2 (2000 Series) 

[2] Press Note No.4 (2006 Series)

[3] Press Note No. 12 (2015 Series)

[4] The distinction between the inventory based e-commerce model and marketplace based e-commerce model was discussed under the ‘Discussion Paper on E-commerce in India 2013-14’brought out by the Department of Industrial Policy and Promotion.

[5] Para 5.2.15.1.2 of FDI Policy 2016

[6] Para 5.2.5 of FDI Policy 2016

[7] Para 5.2.15.3 of FDI Policy 2016

[8] Notes to Para 5.2.15.3 of FDI Policy 2016

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