E-Commerce & Retail

Regulatory Framework on FDI in E-Commerce

Regulatory Framework on FDI in E-Commerce

  • Introduction

With the stated aim of clarifying the foreign direct investment (‘FDI’) regime for e-commerce activities, the Department of Industrial Policy and Promotion (‘DIPP’) has issued Press Note No. 3 (2016 Series) on March 29, 2016 (‘Press Note’). Prior to the Press Note, the Consolidated Foreign Direct Investment Policy issued by DIPP (‘FDI Policy’) allowed 100% FDI under the automatic route (i.e. without requiring prior approval of the Government of India) in business to business (B2B) e-commerce activities, but did not permit FDI in multi-brand retail trade activity through online e-commerce. In such a regulatory landscape, the ‘marketplace’ model became popular; under the marketplace model, the marketplace entity provided a technology platform to connect buyers and sellers and did not itself undertake any trading activity. Such entities received FDI without any prior approvals from the Government of India. The regulatory framework for e-commerce has now been altered by the Press Note in the manner discussed below.

  • Salient Features

i. FDI up to 100% under the automatic route is now permitted in the ‘marketplace’ model (definition discussed below in paragraph (iv) of the section on New Definitions), subject to certain conditions, including those described below.

ii. FDI is not permitted in the ‘inventory-based’ model (definition discussed below in paragraph (iii) of the section on New Definitions).

iii. Subject to the conditions in the FDI Policy applicable to the services sector and applicable laws / regulations, security and other conditionalities, FDI up to 100% is also permitted, under the automatic route, in entities engaged in the sale of services through e-commerce.

iv. Other noteworthy aspects of the new framework for e-commerce include:

        a. the inclusion of goods coupled with services within the purview of e-commerce;

        b. the clarification that marketplace entities are permitted to provide ancillary services such as delivery, logistics etc.;

        c. marketplace entities not being permitted to have sales of more than 25% from one seller / vendor; and

        d. marketplace entities being restricted from directly or indirectly influencing the sale price of goods/ services and being required to maintain a level playing field.

  • New Definitions

The Press Note has introduced the following new definitions:

i. E-commerce: E-commerce means “buying and selling of goods and services including digital products over digital & electronic network”.1 The definition of e-commerce includes buying and selling of goods and services (including digital products) within its purview. At the same time, paragraph 3.0 of the Press Note suggests that the services sector is outside the purview of the Press Note and continues to remain eligible for 100% FDI under the automatic route. The interplay of the definition of e-commerce read with paragraph 3.0 of the Press Note suggests that the Press Note may not apply to entities merely providing services including digital products, except where they are buying and selling both, goods and services.

ii. E-commerce Entity: An e-commerce entity has been defined to mean “a company incorporated under the Companies Act, 1956 or the Companies Act, 2013 or a foreign company covered under section 2(42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2(v)(iii) of the Foreign Exchange Management Act, 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.”

It is not clear why the Government felt the need to include, within the definition of e-commerce entity, a foreign company or a branch or agency in India, when the conditions in the Press Note are applicable only to FDI investment, which is a very specific route of investment in an Indian incorporated entity under the Foreign Exchange Management Act, 1999 and the rules and regulations notified thereunder ( ‘FEMA Regulations’).

An office or branch of a foreign company is merely a form of presence of the foreign company itself, the establishment and operation of which is separately regulated under FEMA Regulations. This kind of presence i.e. a foreign company or an office, branch or agency of a foreign company in India does not actually receive FDI, and therefore inclusion of these kinds of entities in the Press Note (which is intended to govern conditions for FDI in the e-commerce sector) is unclear. Also, given that the definition is restricted to companies and does not specifically include limited liability partnerships (‘LLP’), it is not clear if it is intended to exclude LLPs from the purview of the Press Note, implying that an LLP cannot conduct permissible e-commerce activities.

iii. Inventory Based Model of E-commerce: This model has been defined under the Press Note to mean “an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly”. The Press Note does not permit FDI in entities that operate under an inventory based model of e-commerce.

iv. Marketplace Based Model of E-commerce: The Press Note defines this model as “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.” This is the model that is popular in the market and which has been adopted by various aggregation platforms, more prominently for online hotel / room reservations, taxi booking services and online shopping.

  • Relaxations Provided for the Marketplace Model

i. Marketplace entity allowed to provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services: This clarification is very welcome. Even before the Press Note was issued, a marketplace entity could have engaged in all these activities. However, the specific clarification included in the Press Note brings in more transparency in implementing the policy. The ability for e-commerce entities to provide these kinds of services could result in greater efficiencies as services ancillary to marketplace operations are commonly housed in different legal entities. We expect marketplace entities to be more optimistic about consolidating these functions within a single entity in light of this clarification.

ii. Express Recognition of Marketplace Model: There has been an increasing trend amongst investors to be a little more cautious about investing or increasing their investments in the Indian e-commerce space. While profitability has been a commercial issue and may continue to be an issue in the foreseeable future, there has also been some circumspection that has resulted from the absence of an express policy statement regarding FDI in the e-commerce sector, negative publicity around FDI in e-commerce and queries that have previously been raised by the regulators.

As the Government’s policy is now expressly stated, it will address concerns raised by various trade associations in their petitions before multiple judicial forums, where it is being argued that the marketplace model is not recognized under the FDI Policy and therefore not eligible for FDI. In our view, this argument was flawed since the FDI Policy cannot be expected to positively list every business model or opportunity that emerges in this fast moving technology rich environment. On the contrary, paragraph 6.2 of the FDI Policy specifically clarifies that FDI is allowed up to 100% under the automatic route in sectors and activities not listed in the FDI Policy. Hence, merely because the marketplace model was not expressly mentioned in the FDI Policy, did not imply that such activity was not eligible to receive FDI prior to the Press Note. If each of its ingredients were eligible for FDI investment, such sector/activity was always eligible to receive FDI.

  • Restrictions on the Marketplace Model

i. Marketplace entity cannot exercise ownership over the inventory (goods purported to be sold), as ownership of the goods would result in an inventory based model: While it is clear that ownership of goods by a marketplace entity is not permitted under the Press Note, the scope of the term ‘exercise ownership’ used in paragraph 2.3(iv) of the Press Note is unclear.

ii. Not more than 25% of the sales from one vendor/ its group companies: This condition may affect the business model of certain e-commerce entities, where a significant percentage of sales are often made by one large reseller. Marketplace operators may now have to limit sales made by these resellers to ensure compliance with the Press Note. Such large resellers are therefore impacted despite the Press Note not being applicable to them. While the Press Note does not expressly clarify as to how and when the 25% limit on sales is to be computed, we expect that such compliance will be reviewed on an annual basis. Similar annual checks at the end of the financial year are prescribed in the FDI Policy on wholesale trading where the wholesale entity cannot sell more than 25% of its wholesale turnover to a group company.

iii. Post sales, delivery of goods and customer satisfaction to be seller’s responsibility: There seems to be an inconsistency between this obligation of the seller and the ability of the marketplace entity to provide ancillary support services. On the one hand, the Press Note permits a marketplace entity to provide logistics and ancillary services, while on the other it requires that following the sale, delivery of goods will be the seller’s responsibility. It is likely that the Press Note intended to clarify that the responsibility for all post-sale obligations is that of the seller, and not the marketplace entity. However, contractually, the seller should be free to provide such services in the manner it deems fit (including through an agreement with the marketplace entity, in which case the marketplace entity would be contractually liable to the seller for such services).

iv. Warranty/ guarantee of goods and services sold to be seller’s responsibility: This condition appears to stem from the requirement that goods/ services not be owned by the marketplace entity. This condition seems more in the nature of a clarification rather than a change in the legal position given that a marketplace entity would not usually provide any warranty / guarantee in respect of goods/ services; which warranties / guarantees are usually extended by the manufacturer / service provider.

v. Marketplace entity will not directly or indirectly influence the sale price of goods/ services and will maintain a level playing field: This condition is one of the key changes introduced by the Press Note and is likely to have a significant impact on marketplace entities and their business models. Popular marketplaces invest meaningfully to promote their platform to make it attractive for customers and sellers. Unlike brick and mortar stores which are able to promote their marketplace / shops in numerous ways that can be seen and felt by a customer, there are only a limited number of ways in which an online marketplace entity can promote its virtual presence. The broad language of the Press Note makes it even more difficult for a marketplace entity to promote its platform.

With regard to the obligation to maintain a ‘level playing field’, more than one interpretation may be possible. One school of thought is that this requirement is intended to apply to the sellers on the e-commerce platforms inter-se, such that the marketplace is not built around a single large / dominant seller, which seller is then accorded preferential treatment over other sellers by the marketplace entity. Another reading of this provision could be that the requirement is intended to apply to sellers on the e-commerce platforms vis-à-vis brick and mortar stores, such that brick and mortar stores are not unduly disadvantaged by e-commerce platforms through the actions of such e-commerce platforms, such as through offering discounts / incentives / promotional pricing on goods sold through such platforms. It is however difficult for a marketplace entity to ensure a level playing field with respect to brick and mortar stores, particularly given the inherent differences between the two mediums.

  • Conclusion

The Press Note is a step in the right direction by the Government and has introduced much needed and anticipated clarity on FDI in the e-commerce sector.

The conditionalities and restrictions imposed by the Press Note (which states that it shall take immediate effect) are prospective in nature and are not stated to apply to FDI already received by entities engaged in e-commerce activities. Any marketplace e-commerce entities which now intend to receive FDI would need to ensure that such FDI is received in compliance with all conditions of the Press Note. Likewise, any entities with existing FDI (received prior to the issuance of the Press Note) but which intend to receive additional FDI, would need to ensure that the conditions prescribed by the Press Note are complied with going forward. To this end, it may serve well for all existing e-commerce companies to revisit their business models and ensure that their business models are aligned to the Press Note as soon as possible.

 

 

 

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Amendments to FEMA 20

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

RBI has, by way of a series of notifications, amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (‘FEMA 20’). The key amendments pursuant to these notifications have been summarized below.

i. Issuance of Convertible Notes by Startups: RBI notification dated January 10, 2017 (‘January Notification’) provides for the issuance of convertible notes by Indian startup companies[1] (‘startups’). A ‘convertible note’ has been defined to mean “an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument”.

The newly introduced Regulation 6D of FEMA 20 sets out the relevant provisions, which provide that:

a. A person resident outside India (other than an individual who is a citizen of, or an entity registered / incorporated in, Pakistan or Bangladesh), may purchase convertible notes issued by startups for an amount of Rs. 2,500,000 (approximately US$ 39,000) or more in a single tranche;

b. Startups engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with Government approval;

c. Issue of shares against convertible notes will be as per Schedule 1 of FEMA 20;

d. Startups issuing convertible notes to a non-resident must receive the consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / escrow account maintained as per the Foreign Exchange Management (Deposit) Regulations, 2016 and closed upon the earlier of the requirements having been completed or within a period of six months;

e. Non-resident Indians may acquire convertible notes on non-repatriation basis as per Schedule 4 of FEMA 20;

f.  A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by RBI; and

g. Startup issuing convertible notes are required to furnish reports as prescribed by RBI.

ii. Foreign Investment in Infrastructure Companies: The January Notification also amends conditions relating to foreign direct investment (‘FDI’) under Schedule 1 of FEMA 20 in commodity exchanges, which have been combined with those relating to infrastructure companies in the securities market (namely stock exchanges, commodity derivative exchanges, depositories and clearing corporations). The key revisions introduced by the January Notification are:

a. FDI, including by foreign portfolio investors (‘FPI’), in commodity exchanges will now be subject to guidelines prescribed by RBI in addition to those issued by the Central Government (‘GoI’) and SEBI;

b. FDI in other infrastructure companies in securities market will now be subject to guidelines by GoI and RBI, in addition to those issued by SEBI;

c. the earlier condition permitting FIIs / FPIs to invest in commodity exchanges or infrastructure companies only through the secondary market has been removed; and

d. the restriction on investment by a non-resident in commodity exchanges to a maximum of 5% of its equity shares has been removed.

The Consolidated Foreign Direct Investment Policy dated June 7, 2016 (‘FDI Policy’) has also been amended, by way Press Note 1 of 2017 dated February 20, 2017, to align it with the January Notification.

iii. FDI in LLPs: Pursuant to notification dated March 3, 2017, RBI has amended Regulation 5(9) and Schedule 9 of FEMA 20 to further liberalize FDI in Limited Liability Partnerships (‘LLPs’). Companies having FDI can now be converted into LLPs under the automatic route provided that the concerned company is engaged in a sector where: (a) 100% FDI is permitted under the automatic route; and (b) no FDI linked performance conditions exist. Previously, conversion of companies with foreign investment was only permitted under the approval route. The erstwhile ‘Other Conditions’ stipulated under Schedule 9 of FEMA 20 have been completely omitted resulting in the following key changes:

a. Previously, the designated partner of a LLP having FDI had to satisfy the condition of being “a person resident in India”. Also, a body corporate other than a company registered in India under CA 2013 was not permitted to be a designated partner of a LLP with FDI. These conditions have been removed. Consequently, a LLP having FDI will have to comply only with the provisions of the LLP Act, 2008 for appointment of designated partners;

b. Earlier, designated partners were responsible for compliance with FDI conditions for LLPs and liable for all penalties imposed on a LLP for any contraventions. This condition has now been deleted from Schedule 9 but no corresponding provision has been included in the revised Schedule 9; and

c. Express prohibition on LLPs availing External Commercial Borrowings (‘ECB’) has been removed. However, the extant ECB guidelines have not yet been amended to permit LLPs to avail ECBs. Therefore, LLPs will not be able to avail ECBs until the extant ECB guidelines are amended.

iv. FDI in E-commerce: The Department of Industrial Policy and Promotion had, by way of Press Note 3 of 2016 dated March 29, 2016 (‘Press Note 3’), prescribed that no FDI is permitted in an inventory based model of e-commerce and 100% FDI under the automatic route is permitted in the marketplace model of e-commerce subject to compliance with the guidelines prescribed thereunder. A summary of the key changes introduced through Press Note 3 have been captured in the April 2016 edition of Inter Alia. RBI has, by way of a notification dated March 9, 2017, amended FEMA 20 in line with the changes introduced through Press Note 3. However, RBI has introduced a minor change to Press Note 3 by clarifying that the threshold of 25% of sales emanating from one vendor or their group companies will be computed based on the sale value during the relevant financial year.

[1]     Being a private company incorporated under CA 2013 and recognized as such as per Notification G.S.R. 180(E) dated February 17, 2016 issued by the Department of Industrial Policy and Promotion.

 

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Foreign Direct Investment Policy, 2017

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

On August 28, 2017, the Department of Industrial Policy and Promotion (‘DIPP’) issued the consolidated foreign direct investment policy circular of 2017 (‘FDI Policy 2017’), which replaces the consolidated foreign direct investment policy circular of 2016, dated June 7, 2016 (‘FDI Policy 2016’). The FDI Policy 2017 also consolidates press notes issued by the DIPP since June 7, 2016.

Set out below are the key changes introduced in the foreign direct investment (‘FDI’) regime through the FDI Policy 2017.[1]

i. Conversion of companies and LLPs: The FDI Policy 2016 did not cover or prescribe any rules for conversion of companies into Limited Liability Partnerships (‘LLPs’) and vice versa. The FDI Policy 2017 now provides that conversion of LLPs with foreign investment into a company and vice-versa is permitted under the automatic route, if the converting LLP / company is operating in sectors/activities in which: (a) 100% FDI is allowed through the automatic route; and (b) there are no FDI linked performance conditions. The term ‘FDI linked performance conditions’ has been clarified to mean “sector specific conditions for companies receiving foreign investment”.

ii. Retail trading by wholesale companies: Per FDI Policy 2016, a wholesale / cash & carry trade was permitted to undertake ‘single brand retail trading’. FDI Policy 2017 provides that wholesale/cash & carry traders may undertake ‘retail trading’, i.e., both single brand retail trading and multi brand retail trading (subject to applicable conditions).

iii. ‘State of the Art’ and ‘Cutting Edge’ single brand product retail trading:

a. Press Note 5 (2016 series) dated June 24, 2016 issued by the DIPP did away with local sourcing norms for a period of three years from commencement of business (being, opening of the first store) for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible.[2]

b. FDI Policy 2017 provides that a committee under the chairmanship of Secretary, DIPP, with representatives from NITI Aayog, concerned administrative ministry and independent technical expert(s) on the subject will examine the claim of applicants on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology where local sourcing is not possible and give recommendations for such relaxation.

iv. E-commerce: Under the FDI Policy 2016, an e-commerce entity with foreign investment was not permitted to effect more than 25% of sales through its market place by one vendor or its group companies. FDI Policy 2017 clarifies that the 25% threshold applies to sales value on a financial year basis.

v. Government approval for additional FDI: Per FDI Policy 2016, additional FDI into the same entity within the approved foreign equity percentage or into a wholly owned subsidiary did not require fresh Government approval. FDI Policy 2017 provides that Government approval will be required for additional FDI within the approved foreign equity percentage or into a wholly owned subsidiary beyond a cumulative amount of Rs. 5,000 crores (approx. US$ 764 million).

vi. Downstream investment intimation: FDI Policy 2017 requires intimation of downstream investments by foreign owned and/or controlled Indian companies to be made to the Reserve Bank of India (‘RBI’) and the Foreign Investment Facilitation Portal within 30 days of the investment (instead of the Secretariat of Industrial Assistance, DIPP and the Foreign Investment Promotion Board, as prescribed earlier).

[1]     This article does not cover changes introduced through press notes and other amendments since June 7, 2016 (which have only been consolidated and introduced in the FDI Policy 2017).

[2]     Incorporated in Note (iii) of Paragraph 5.2.15.3 of FDI Policy 2017

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Revisions to FDI Policy

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

The Department of Industrial Policy and Promotion (‘DIPP’) has, by way of Press Note No. 5 dated June 24, 2016 (‘Press Note 5’), introduced the following notable amendments to the FDI Policy:

i. 100% foreign direct investment (‘FDI’) is permitted under the approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India;

ii. In the defence sector, FDI beyond 49% is permitted through the approval route, where the investment results in Indian access to modern technology or for other reasons. The erstwhile condition for such FDI, requiring such investment to result in access to ‘state-of-art’ technology, has been dispensed with;

iii. Foreign investment in the civil aviation sector has been liberalised, whereby: (a) 100% FDI is permitted under the automatic route in brownfield and greenfield airport projects; and (b) FDI has been raised to 100% (with up to 49% under the automatic route and 100% through the automatic route for non-resident Indians (‘NRIs’)) for scheduled air transport services, domestic scheduled passenger airlines and regional air transport services. Foreign airlines continue to be allowed to invest in the capital of Indian companies operating scheduled and non-scheduled air-transport services up to 49%;

iv. FDI in brownfield pharmaceutical projects has been permitted up to 100%, with 74% under the automatic route. However, a non-compete clause is not permitted in transactions, except in certain special circumstances with the prior approval of the Foreign Investment Promotion Board;

v. Local sourcing norms have been relaxed for three years for entities engaged in single brand retail trading of products having ‘state-of-art’ and ‘cutting edge’ technology, and where local sourcing is not possible;

vi. FDI in private security agencies has been raised to 74%, with 49% permitted under automatic route. It is clarified that the terms ‘private security agencies’, ‘private security’, and ‘armoured car service’ will have the same meaning as ascribed to such terms under the Private Security Agencies (Regulation) Act, 2005. Accordingly, private security agencies would include any person (other than any governmental agency) providing private security services including training of private security guards and deployment of armoured cars;

vii. FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture was permitted up to 100% under the automatic route under controlled conditions. The requirement of ‘controlled conditions’ for FDI in these activities has now been removed; and

viii. 100% FDI in broadcasting carriage services, including teleports, direct to home, cable networks, mobile TV and headend-in-the-sky broadcasting services, has been permitted under the automatic route.

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Amendments to FEMA 2017

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

The RBI has, by its notification dated March 26, 2018 introduced the following amendments to the sector specific policy for foreign investment, under FEMA 2017:

i. Foreign investment in investing companies: (a) Foreign investments in investing companies not registered as non-banking financial companies (‘NBFCs’) with the RBI and in core investment companies, both engaged in the activity of investing in the capital of other Indian entities, will require prior Government approval; and (b) foreign investment in investing companies registered as NBFCs with the RBI, will not require any prior approval and will be permissible under 100% automatic route.

ii. Single brand product retail trading: In case of entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible, a committee under the chairmanship of the Secretary, DIPP, with representatives from Niti Aayog, concerned Administrative Ministry and independent technical expert(s) on the subject will examine the claim on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology, and give recommendations for such relaxation.

iii. Issuance of capital instruments to persons resident outside India: No prior Government approval will now be required for issuance of capital instruments to persons resident outside India against: (a) import of capital goods / machinery / equipment (excluding second hand machinery); or (b) pre-operative / pre-incorporation expenses, unless the Indian investee company is engaged in a sector under the Government route.

As set out in our January 2018 edition of the Inter Alia, the Union Cabinet had approved certain amendments to the foreign direct investment regime in India on January 10, 2018, which have now been incorporated in FEMA 2017.

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Abolition of the Foreign Investment Promotion Board

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

The Department of Economic Affairs, Ministry of Finance (‘DEA’), has, by way of an office memorandum dated June 5, 2017, notified the Government’s approval to abolish the Foreign Investment Promotion Board (‘FIPB’). 11 sectors (including telecom, broadcasting, defence and banking) would continue to require Government approval for foreign investments, while the responsibility to grant such approvals would now vest with the concerned administrative ministries / departments. Applications for investment in core investment companies or Indian investing companies, and investments in financial services sectors not regulated by any financial services regulator, will be processed by DEA.

Further, the following foreign investment proposals requiring Government approval, will be dealt with by the Department of Industrial Policy and Promotion (‘DIPP’):

i. Trading (Single, Multi brand and Food Product Retail Trading);

ii. Proposals by non-resident Indians / export oriented units;

iii. Issue of equity shares under the Government route for import of capital goods / machinery / equipment (including second hand machinery); and

iv. Issue of equity shares for pre-operative / pre-incorporation expenses.

The DIPP will identify the relevant ministry in respect of applications where there is doubt about the administrative ministry concerned. The office memorandum also specifies that all applications pending with the FIPB portal as on the date of abolition of FIPB, will be transferred immediately by the DIPP to the relevant administrative ministry / department.

The DIPP has also issued a detailed standard operating procedure (‘SOP’) on June 29, 2017, which outlines the guidelines to the relevant administrative ministries / departments for processing of the FDI proposals. The SOP inter alia prescribes the process of inter-ministerial consultations as well as indicative timelines within which the proposals are to be assessed and disposed off. The applications will continue to be filed on the current online FIPB portal (now renamed as the ‘Foreign Investment Facilitation Portal’).

The SOP further prescribes that proposals involving a total foreign equity inflow of more than INR 5,000 crores (approx. USD 772 million) will additionally require the approval of the Cabinet Committee on Economic Affairs (Ministry of Finance), and that the concerned ministry will also seek DIPP concurrence where a proposal is being rejected or being granted subject to conditions not specified in the relevant laws.

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E-Commerce Operators to collect 1% GST from October 1, 2018

Published In:Inter Alia - Quarterly Edition - September 2018 [ English Chinese japanese ]

Goods and Services Tax (‘GST’) laws provide that every Electronic Commerce Operator (‘ECO’)[1], not being an agent, is required to collect tax at source (‘TCS’) on the net value of taxable supplies made through it by other vendors, where the consideration for such supply is to be collected by the ECO. Although GST was introduced with effect from July 1, 2017, the provisions relating to TCS were kept in abeyance thus far. The Central Board of Indirect Taxes and Customs has now notified that the provisions pertaining to TCS would be applicable from October 1, 2018. Further, the rate of TCS has been notified to be 1% (0.5% Central GST + 0.5% State GST for intra state supply; or 1% Integrated GST for inter-state supply). Accordingly, ECOs would be required to collect 1% TCS on the net value of each taxable supply made through them with effect from October 1, 2018.

[1] ECO has been defined under GST to mean as any person who owns, operates or manages digital or electronic facility or platform for electronic commerce. As the GST laws do not provide for centralized registration, every ECO (foreign or domestic) is required to obtain registration with GST authorities in each State where the vendors might be supplying from through such ECO, before October 1, 2018.

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CCI Approves Walmart’s Acquisition of the Outstanding Shares of Flipkart

Published In:Inter Alia Special Edition Competition Law October 2018 [ English ]

On August 08, 2018, CCI approved the proposed acquisition of 51% to 77% of outstanding shares of Flipkart Private Limited (‘Flipkart’) by Wal-Mart International Holdings, Inc. (‘Walmart’).[1] Walmart, which is part of the Walmart group, is present in India through its indirect wholly-owned subsidiary Walmart India Private Limited (‘Walmart India’). Flipkart, on the other hand, is principally an investment holding company incorporated in Singapore with presence in India. Walmart and Flipkart are together referred to as ‘Parties.

Walmart India is engaged in wholesale cash and carry of goods (‘B2B Sales’) operating: (i) 20 B2B Sales stores spread across nine states in India; and (ii) a B2B e-commerce platform. Both operate on a ‘members-only’ model. While Flipkart is also present in B2B Sales, unlike Walmart India, it (i) operates a marketplace based e-commerce platforms (B2C Sales); and (ii) other ancillary services such as payment gateway, unified payment interface, advertising services, information technology product related issues, etc..

CCI noted that the presence of both Walmart India and Flipkart in overall B2B Sales or in any narrower segment was insufficient to raise competition concerns. The combined market share of the Parties was less than 5%, with Walmart India’s market share being less than 0.5%. CCI also considered a narrower B2B Sales market on the basis of vertical segmentation. While Flipkart was relatively strong in the mobile and electronic market, Walmart’s operations in this segment were insignificant. Operations of Walmart focused on groceries whereas Flipkart was not present in this market. While both were present in the market for lifestyle products, the combined value of both Parties’ was low and relatively insignificant in comparison to the size of the markets. CCI did not distinguish between organized and unorganized B2B Sales as the market was found to be competitive on account of larger players such as Reliance Retail, Metro Cash and Carry, Amazon wholesale etc..

In terms of the vertical overlap, CCI noted that both Walmart India and Flipkart were restricted under the foreign direct investment (‘FDI’) policy from participating in B2C Sales. In any event, it was noted that, while Flipkart offered online marketplace platform to facilitate B2C Sales, Walmart was not engaged in any such services. Accordingly, no vertical overlap existed.

CCI’s order records that it had received representations against this transaction from traders and retailers relating to: (i) allegations of predatory pricing; (ii) concerns over compliance of FDI norms; (iii) concerns over preferential treatment to specified sellers in Flipkart’s online marketplaces and (iv) concerns over impact of the transaction on employment, entrepreneurship, and retailing among other things. CCI noted that the majority of concerns raised had no nexus with competition law and were beyond CCI’s jurisdiction. Against allegations of deep discounting and preferential treatment to select sellers that were within CCI’s domain, CCI observed that Flipkart’s discounting practice and preferential treatment to some of its retailers was not specific to, and did not result from the proposed combination under review. Clarifying the scope of regulation under Sections 5 and 6 of the Act, CCI opined these practices were unrelated to the proposed combination although CCI may examine these concerns under Sections 3(4) and 4 of the Act.

The retailers and traders have now appealed CCI’s decision before NCLAT. NCLAT has directed Walmart and Flipkart to provide details of their business models in the relevant markets in India.

[1] Combination Registration No. C-2018/05/571

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CCI Dismisses Complaint Against Shoppers Stop

Published In:Inter Alia Special Edition Competition Law October 2018 [ English ]

By way of an order dated July 30, 2018, the CCI dismissed information received against Shoppers Stop Limited (‘SSL’) alleging a contravention of Section 3 of the Act and unfair trade practices.[1] The Informant was aggrieved by the requirement to meet a minimum purchase amount in order to successfully redeem a discount coupon issued on a previous purchase. It was further alleged that SSL failed to direct the Informant to a competent authority to address his grievance.

CCI held that the information was in the nature of an individual consumer dispute rather than a matter of competition concern and did not cause an adverse effect on competition. In arriving at its finding, CCI referred to its earlier decisions in Sanjeev Pandey v. Mahindra & Mahindra[2] and Subash Yadav v. Force Limited[3] in which it clarified that the scope of the Act is limited to curbing anti-competitive practices that have an adverse effect on competition, while the Consumer Protection Act, 1986 protects individual consumer interest against deficiencies in goods and services. On this basis, CCI held that the information did not make out a prima facie case against Shopper Stop and accordingly dismissed the information.

[1] Case No. 21 of 2018
[2] Case No. 17 of 2012
[3] Case No. 32 of 2012

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CCI dismissed allegations of resale price maintenance against Timex

Published In:Inter Alia Special Edition Competition Law October 2018 [ English ]

On August 14, 2018, CCI dismissed information filed against the Timex Group India Limited (‘Timex’) filed by one of its non-exclusive online distributors, M/s Counfreedise (‘Informant’). The Informant is engaged in purchasing lifestyle products such as belts, wallets, sunglasses etc. and selling them on several e-commerce platforms such as Flipkart, Paytm Mall and Amazon (under the trade name ‘BUYMORE’).

The Informant alleged that Timex stopped doing business with it after it chose not to comply with Timex’s RPM ‘diktat’ – which was in contravention of Section 3(4)(e) of the Act. It was also alleged that by engaging with other online distributors that offered similar discounts, Timex discriminated against the Informant under Section 4 of the Act. It was also alleged that Timex had abused its dominant position by initiating sham litigation and allegedly failing to provide after-sale services to customers who purchased Timex wrist watches from the Informant in contravention of Sections 3 and 4 of the Act.

For the purpose of delineating the relevant market to examine allegations under Section 4 of the Act, CCI opined that consumers who were interested in durability, quality, established network for sales, after-sales and warranty services tended to prefer branded wrist watches over unbranded ones. CCI therefore believed this distinction separated the organized (where Timex was present) from the unorganized market for watches. On this basis, CCI defined the relevant market as the “market for manufacture and sale of wrist watches in the organized watch industry in India.” While CCI acknowledged that wrist watches may be further categorized into three segments based on price i.e., (a) mass-price segment for primarily unorganized manufacturers; (b) mid-segment (that included Titan, Citizen and Timex); and (c) premium segment which included international players like Rolex, Tagheuer, Rado etc.. However, CCI observed that as Timex (along with its competitors) existed in all three categories, competitive assessment would not undergo any material change, even if the market was not segregated under each of these segments.

On dominance, CCI observed that Titan admittedly held the largest market share at 60% and Timex could not thus be ‘dominant.’ Whilst CCI held that absent dominance, no case of abuse may be sustained against Timex, it nevertheless examined the allegations of abuse of dominance against Timex.

Against allegations of Timex having initiated sham litigation against the Informant by instituting (and obtaining an ex parte injunction in) a suit for trademark infringement, CCI observed that Timex had initiated similar suits against several others, including around the same time, and was able to seize thousands of counterfeit goods. As holders of intellectual property have the right to take reasonable actions to protect their right, such action cannot be said to violate the provisions of the Act.

In relation to allegations of RPM, CCI observed that an isolated email to the Informant by Timex asking to control discounts without any evidence of follow on adverse action (from the record CCI observed that Timex continued to supply to the Informant even after the said email) cannot qualify as an RPM. CCI also observed that for RPM to be effective, it has to be imposed on all online retailers. Admittedly, Timex supplied to other online platforms that offered greater discounts. CCI additionally noted that in order for RPM to be anti-competitive, it needed to result in an AAEC. To the extent that Timex did not have sufficient market, was just one of several watch manufacturers and did not enforce RPM across the distribution channel, it could not be said to have caused an AAEC. Accordingly, the allegation of RPM could not be sustained.

Placing reliance on Ashish Ahuja v. Snapdeal.com[1], CCI observed that market players have a right to deny after sale or warranty services to discourage counterfeit good- that cannot be termed anti competitive. CCI equally dismissed the charge that Timex’s refusal to deal with the Informant was an anti-competitive refusal to deal under Section 3(4) of the Act. CCI held that as (i) sales by Timex to the Informant was insignificant compared to Timex’s total sales and (ii) revenue derived by the Informant from selling Timex watches was not significant, any refusal to deal could not be said to result in an AAEC, particularly when, as in this case, there existed reasonable apprehension of brand dilution by the Informant.

[1] Case No. 55 of 2017

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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.
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Changing Landscape of Intermediary Liability

The High Court of Delhi (‘Court’), in a spate of recent judgments, has critically evaluated the liability of e-commerce platforms in respect of trademark infringement, by carefully examining the business model of the e-commerce platform and the role played by such e-commerce platform in the overall transaction, involving marketing and sale of products to end consumers. The Court has provided substantive guidance on when an e-commerce player operating a marketplace can claim to be an ‘intermediary’, and claim immunity or ‘safe harbour’ under Section 79 of the Information Technology Act, 2000 (‘IT Act’). Section 79 of the IT Act, more popularly known as the ‘safe harbour’ provision, essentially immunizes certain types of intermediaries from liability qua third-party content and material, hosted or made available by them, provided such intermediaries fulfil the prescribed conditions.

The first and foremost of these judgments was rendered in the matter of Christian Louboutin SAS v. Nakul Bajaj & Ors.[1] In this case, Christian Louboutin (‘Plaintiff’), the registered proprietor of the single-colour mark for its distinctive ‘red sole’ filed a suit against www.darveys.com  (‘Defendant’), a website marketing itself as a ‘luxury brands marketplace’ (‘Louboutin Case’), for marketing, offering and selling allegedly counterfeit Louboutin branded products using the name and image of Mr. Christian Louboutin. According to the Plaintiff, the Defendant was also using the Plaintiff’s registered trademarks and the names ‘Christian’ and ‘Louboutin’ as ‘meta-tags’ on its website and in turn, diverting internet traffic. The Defendant, however, argued that the goods sold on the website were genuine. The Defendant further claimed that it was merely booking orders, placed by customers, whose supplies are effected through various sellers and, therefore, it was a mere intermediary, entitled to protection under Section 79 of the IT Act.

At the outset, the Court examined the definition of an ‘intermediary’ under the IT Act and emphasized that its role is limited to ‘receiving, storing, transmitting an electronic record or providing a service with respect to that record’. The Court further observed that in assessing whether an e-commerce platform can be considered as an ‘intermediary’, it is important to assess whether such platform played only an inactive or passive role in the marketing and selling process; in other words, whether such a platform was merely acting as a conduit or passive transmitter of records or of information. Further, the Court also observed that it must be analysed whether such an e-commerce platform is taking adequate measures to ensure that no unlawful acts are committed by the sellers. The Court laid down certain factors to assess this, which include: (i) the terms of agreements entered into between the platform and the sellers; (ii) the manner in which terms were enforced; (iii) whether adequate measures have been put in place to ensure trademark rights are being protected; and (iv) whether the platforms have knowledge of unlawful acts.

The Court found that the Defendant was not an ‘intermediary’ as it was substantively involved in the business operations and had control over the products being sold on the platform. The Court found that the Defendant was actively involved in, inter alia: (a) identifying the sellers; (b) enabling the sellers actively; (c) promoting them; (d) selling the products in India; (e) providing guarantee of authenticity for products on the platform; and (f) claiming that it has relationships with the exclusive distributors of the Plaintiffs’ products etc. The Court further observed that on www.darveys.com, the seller and the person from whom the seller purchases the goods are not known and it is also unclear whether goods are genuine. In view of this, the Court observed that the conduct of the Defendant amounted to ‘conspiring, abetting, aiding or inducing unlawful activity’ as it promoted the infringing products to its members who signed up on the website (by payment of a membership fee). In view of this, the Court came to a finding that the Defendant was not entitled to any protection as an ‘intermediary’ under the IT Act.

The Court, inter alia, directed the Defendant to disclose complete details of all its sellers including their contact information, obtain a certificate of authenticity from its sellers and implement a system whereby upon being notified of any counterfeit product by the Plaintiff, the Defendant must ascertain the authenticity of the product with the seller on its site and thereafter, examine the same with evidence to check if it must be removed. Lastly, the Court further ordered that the Defendant should remove all meta-tags containing the Plaintiff’s mark.

Placing reliance on the Louboutin case, the Court has held two more e-commerce players, being www.kaunsa.com and www.shopclues.com liable for trademark infringement in the cases of Luxottica v. Mify Solutions[2] and L’Oréal v. Brandworld & Anr.[3], respectively.

These decisions are undoubtedly a big step forward in ensuring that brand owners’ rights on e-commerce platforms are protected. The decision in the Louboutin case is especially important as it throws light on specific situations in which an e-commerce marketplace can claim ‘safe harbour’ under the IT Act. Another key practical implication of these cases is that e-commerce marketplaces may now be required to re-evaluate their business models as well as the role they play in the marketing and sale of products on their platforms.

[1] CS(COMM) 344/2018, order passed by Hon’ble Mrs. Justice Pratibha Singh dated November 2, 2018.
[2] CS (COMM) 453/2016, Luxottica Group S.P.A. and Ors. vs. Mify Solutions Pvt. Ltd. and Ors. (12.11.2018 – DELHC)
[3] CS(COMM) 980/2016 – Delhi High Court

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CCI Dismisses Allegations of Abuse of Dominance against Flipkart India

Published In:Inter Alia Special Edition Competition Law November 2018 [ English ]

On November 6, 2018, CCI dismissed information alleging abuse of dominance under Section 4 of the Act by All India Online Vendors Association (‘AIOVA’) against Flipkart India Private Limited (‘Flipkart’) and Flipkart Internet Private Limited (‘Flipkart Internet’), collectively referred to as ‘Flipkart entities’.[1]

It was argued that Flipkart sells goods to WS Retail Services Private Limited (‘WS Retail’) which was owned by Flipkart Internet (till 2012) at a discounted price and these goods are then sold on Flipkart Internet’s platform i.e., Flipkart.com. This was alleged to amount to preferential treatment to certain sellers. Further, it was alleged that Flipkart Internet is using its dominance in the relevant market to enter into another market of manufacturing products by providing discounts under private labels.

In order to analyze the conduct under Section 4 of the Act, CCI defined the relevant market as ‘services provided by online marketplace platforms for selling goods in India’. CCI observed that there are multiple players in the online marketplace platforms and though the size and resources of Flipkart are large, no one player is commanding a dominant position in the relevant market at this stage of the evolution of the market. Considering that the Flipkart entities are not dominant in the relevant market, abuse of dominance does not arise. However, CCI did note the submissions made by the Flipkart entities on merits, namely:

(i)      there is no abusive conduct by Flipkart or its entities since their B2B arrangements are neither exclusive nor do they impose any restraints on any reseller choosing to sell its product through Flipkart’s platform;

(ii)    structural link with WS Retail, as admitted in the information, existed only till 2012 and  WS Retail is no longer a seller on Flipkart’s marketplace;

(iii)    as regards abusive conduct by Flipkart Internet, the terms and conditions on which sellers access the marketplace are standard; and

(iv)     the marketplace is bound and compliant by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.

CCI held that no case of contravention of the provisions of Section 4 of the Act is made out against the Flipkart entities. The decision also notes that CCI came to this conclusion after holding preliminary conferences with Amazon Seller Services Private Limited (being a key player in the relevant market) while noting that intervention in the relatively nascent and evolving model of retail distribution in India needs to be carefully crafted, lest it stifles innovation.

[1] Case No. 20 of 2018.

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