Review of FDI in E-commerce

The Department of Industrial Policy and Promotion (‘DIPP’) has issued Press Note 2 of 2018 (‘PN2’) in connection with the foreign direct investment (‘FDI’) policy for entities engaged in the e-commerce sector. PN2 has been formulated with an intent to provide clarity to the existing FDI policy concerning the e-commerce sector. On January 3, 2019, the DIPP also issued certain clarifications to PN2 (‘PN2 Clarification’) with the objective of providing responses to the comments reported in the media on PN2.

By virtue of PN2, the existing framework applicable to entities engaged in e-commerce, and having received foreign investment has been revised.

While the prohibition to carry on the ‘inventory-based model of e-commerce’ continues to exist, by virtue of this PN2, certain new conditions have been made applicable to the ‘marketplace model of e-commerce’ – despite the sector continuing to remain eligible to receive upto 100% FDI under the automatic route. The revised policy on FDI in e-commerce under PN2 will take effect from February 1, 2019.

The PN2 Clarification clarifies that an e-commerce platform operating an inventory based model does not only violate the FDI policy on e-commerce but also circumvents the FDI policy restrictions on multi-brand retail trading, and therefore, PN2 has been issued to ensure that the rules are not circumvented.

Key Highlights

  • Marketplace Entity cannot exercise ‘control’ over inventory of the sellers: In addition to the existing restriction applicable to an e-commerce entity operating a marketplace (‘Marketplace Entity’) on exercising ‘ownership’ over the inventory (i.e. the goods purported to be sold), the Marketplace Entity is now expressly restricted from exercising ‘control’ over the inventory of a seller on its marketplace. Any such ownership or control over the inventory will render the business of the Marketplace Entity as an inventory-based model of e-commerce – PN2 continues to expressly prohibit FDI in the inventory-based model of e-commerce.
  • Deemed Control over inventory: PN2 clarifies that a Marketplace Entity will be ‘deemed’ to have exercised control over the inventory of a seller, if more than 25% of the purchases of such seller are from the Marketplace Entity or its group companies.
  • Removal of restriction on single seller not selling more than 25% of sales on the marketplace: Prior to PN2, a single seller (including its group companies) could not have sold more than 25% of the sales value on the marketplace. With the introduction of PN2, this restriction that limits sales made by a seller (or its group companies) to 25% of the total sales on the platform, appears to have been removed.
  • Sellers having equity participation by the Marketplace Entity or its group companies are not permitted to sell products on such marketplace: A seller entity that has equity participation from the Marketplace Entity (having FDI) / its group company or whose inventory is controlled by the Marketplace Entity/ its group company, is not permitted to sell products on such platform run by the Marketplace Entity. In this context and by way of the PN2 Clarification, the DIPP has clarified that that PN2 does not impose any restriction on the nature of products which can be sold on the marketplace, including any private labels.
  • Non-discriminatory treatment to sellers in similar circumstances: Apart from the existing condition on Marketplace Entities to not, directly or indirectly, influence the sale price of goods or services and the obligation to maintain level playing field, PN2 contemplates that services may be provided by the Marketplace Entity or other entities in which the Marketplace Entity has direct or indirect equity participation or common control, to the sellers on its platform. Such services will include, without limitation, fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing. However, these services are required to be provided at arm’s length and in a fair and non-discriminatory manner. In this regard, PN2 further states that provision of services to a seller on terms which are not made available to other sellers in similar circumstances will be deemed to be unfair and discriminatory.
  • Cashbacks: PN2 now expressly requires that cashbacks provided by group companies of the Marketplace Entity to the buyers should be fair and non-discriminatory.
  • Exclusivity: PN2 requires a Marketplace Entity not to mandate any seller to sell any product exclusively on its platform only.
  • Reporting obligations: Pursuant to PN2, the Marketplace Entity will be required to furnish a certificate, along with a report of the statutory auditor, to the Reserve Bank of India confirming its compliance with the conditions stipulated under PN2. This certificate is required to be submitted on an annual basis, by the 30th of September each year for the preceding financial year.
  • PN2 only applies to Marketplace Entities: PN2 Clarification also clarifies that PN2 is only applicable to Marketplace Entities and that FDI in other sectors continue to be governed by the specific provisions pertaining to them under the extant FDI policy. For instance, there is no change in the FDI policy on food product retail trading, which permits upto 100% FDI under approval route, including through e-commerce, in respect of food products manufactured and/or produced in India.
Date: January 11, 2019