SKP Business Alert
Volume 8 Issue 1 |
Guidelines for Foreign Direct Investment (FDI) in e-commerce

Recently, the Department of Industrial Policy and Promotion (DIPP) issued a press note[1] defining the nature of e-commerce and providing clarity on FDI in the sector. The extant FDI Policy defines e-commerce activity as “the activity of buying and selling by a company through the e-commerce platform”. Therefore, the regulatory status with respect to foreign investments in the e-commerce sector is as follows:
  • 100% FDI is allowed under the automatic route (i.e. approval of the Foreign Investment Promotion Board is not required) in multi brand and single brand trading companies engaged in B2B (business-to-business) (wholesale trading) e-commerce;
  • Single Brand Retail Trading (SBRT) companies operating through brick and mortar stores are allowed to engage in SBRT by means of e-commerce; and
  • FDI is not allowed in companies who engage in multi brand retail trading by means of e-commerce
These restrictions are related to the sale of goods and not services.
 
Several issues regarding FDI in the marketplace model of e-commerce were raised; however, there was nothing to indicate the illegality of the model. Because of this uncertainty, the DIPP issued Press Note 3 dated 29 March 2016 to clarify the points mentioned below:
  • E-commerce means buying and selling of goods and services including digital products over digital and electronic networks;
  • The inventory based model of e-commerce means an e-commerce activity where the inventory of goods and services is owned by the e-commerce entity and is sold to consumers directly. FDI is not permitted in the inventory based model;
  • The marketplace model of e-commerce means providing an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between the buyer and seller; 100% FDI under the automatic route is permitted in the marketplace model of e-commerce;
  • A marketplace e-commerce entity can enter into transactions with sellers registered on its platform on a B2B basis;
  • An e-commerce marketplace may provide support services to sellers for warehousing, logistics, order fulfillment, call centres, payment collection and other services;
  • An e-commerce entity providing a marketplace model will not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory will render the business as an inventory based model of e-commerce;
  • An e-commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies;
  • In the marketplace model, goods/services made available for sale electronically on the website should clearly provide the name, address and other contact details of the seller. After sales services, delivery of goods to the customers and customer satisfaction will be the responsibility of the seller;
  • In the marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India;
  • In the marketplace model, any warranty/guarantee of goods and services sold will be responsibility of the seller;
  • E-commerce entities providing a marketplace will not directly or indirectly influence the selling price of goods or services and shall maintain a level playing field.;
  • Guidelines on cash and carry wholesale trading as given in paragraph 6.2.16.1.2 of the FDI Policy will apply on B2B e-commerce;
  • Subject to the conditions of the FDI Policy on the services sector and the applicable laws/regulations, security and other conditionalities, sale of services through e-commerce will be under the automatic route.
SKP's comments
The definition of e-commerce in this press note widens the scope of business for e-commerce and includes TV channels, network sites, networks of computers and any other internet application used in an automated manner. Services have also been included in the definition of e-commerce. It has also defined the ‘marketplace model’ and ‘inventory based model’. The press note also clarified that FDI in the inventory based model is prohibited. This would mean that e-commerce entities will lose control over the stock, quality and pricing of goods and services.

The biggest challenge in the marketplace model was the preferential treatment given to favored vendors. The new guidelines aimed at the prevention of predatory pricing clarifies that e-commerce entities cannot influence the selling price of goods or services. In other words, the marketplace model is a true reflection of the fact that e-commerce entities only provide a platform and cannot influence or intervene in the commercial terms of the transaction whichis purely between the seller and the buyer of the goods and services. These are anti-abuse provisions and hence, the seller will be directly responsible for any warranty/guarantee of the goods and services.
 
This press note is a welcome step to as it clarifies the position regarding FDI in e-commerce which was previously uncertain.
SKP
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