FDI in E-commerce

The Indian retail industry has emerged as one of the most dynamic and fast-paced industries due to the entry of several new players. It is not only a form of business but more a mode of earning of livelihood for tens of millions of people in the Country. India’s e-commerce market has witnessed a phenomenal growth in the past recent years and is still flourishing. Foreign Direct Investment in E-Commerce in India can lead to an influx of capital, further enhancing its growth potential. India is estimated to become the 3rd largest consumer economy by 2025 (consumption expenditure to increase 3 times to reach $4 trillion).

Factors that make India so attractive include the second largest population in the world, a middle class of 600 million people, increasing urbanization, rising household incomes, connected rural consumers and increasing consumer spending.

The new FDI rules in e-commerce effective from February 01, 2019 are aimed at safeguarding the interests of offline retailers.

The FDI policy in India allows e-commerce activities under automatic route with 100% equity, subject to below primary conditions:

Let’s understand some relevant terms as below for more clarity:

• Marketplace based model of e-commerce– 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.
• Inventory based model of e-commerce– Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
• Digital and electronic network will include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles, etc.

The recent FDI norms bar exclusive tie-ups between e-commerce firms that follow the ‘marketplace model’ and vendors using their platform. In a marketplace model, the e-commerce firm is not allowed to directly or indirectly influence the sale price of goods or services and is required to offer a level playing field to all vendors.

To emphasize this point, the new norms said cashback or services, such as quick delivery, offered by e-tailers must be applicable to all vendors on their platforms. It also said that if a vendor sells more than 25% of its wares through an e-commerce marketplace, the latter will be deemed to have an inventory model, in which FDI is not allowed. Further, the onus of ensuring it is firmly on the e-commerce platform, so that it does not find itself on the wrong side of the law.

However, the Department of Industrial Policy and Promotion (DIPP) updated Press Note 2 (2018 series) to provide clarity on the functioning of an e-commerce marketplace as below:

• E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call center, payment collection and other services.
• E-commerce entity providing a marketplace cannot exercise ownership over the inventory e. goods purported to be sold. Such an ownership over the inventory will render the business into inventory-based model.
• An e-commerce entity shall not permit more than 25% of the sales value on financial year basis affected through its marketplace from one vendor or their group companies.
• In marketplace model, goods/services made available for sale electronically on website should clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction will be responsibility of the seller.
• An entity having equity participation by e-commerce marketplace entity or its group companies or having control on its inventory by e-commerce marketplace entity or its group companies are not permitted to sell its products on the platform run by such marketplace entity.
• Payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.
• Any warrantee/ guarantee of goods and services sold will be responsibility of the seller.
• E-commerce entities will not mandate any seller to sell any product exclusively on its platform only.
• E-commerce entities providing marketplace will not directly/ indirectly influence the sale price of goods/ services and shall maintain level playing field. Services should be provided by e-commerce entity or other entities in which e-commerce marketplace entity has direct/ indirect equity participation or common control, to vendors on platform at arm’s length and in a fair and non-discriminatory manner.
• E-commerce entity will be required to furnish a certificate along with a report of statutory auditor to RBI, conforming compliance of above guidelines, by 30th September of every year for preceding FY.

Subject to the conditions of FDI policy on services sector and applicable laws/regulations, security and other conditionalities, sale of services through e-commerce will be under automatic route.

Conclusion

E-commerce companies, such as Amazon and Flipkart, have been luring customers with deep discounts and exclusive offerings. Offline traders have been complaining that e-commerce platforms with access to FDI are able to give deep discounts and other incentives through related-party vendors, which they cannot match. Most customers shop online for deep discounts and exclusive offerings, which may not be available on other online platforms, or in offline stores. This will, in turn, have an impact on the revenue and growth of e-commerce companies in India.

The bar on such firms ‘influencing’ pricing and mandating vendors to sell exclusively on their platforms may have a major impact on customer behavior.

The changes in FDI policy are significant as its enforcement will affect the flexibility that e-commerce platforms had in doing business and force them to be neutral to all vendors. It will also have an impact on private labels being sold by e-commerce companies.

About the Author

Author is Neeraj Bhagat, FCA helping foreign companies in setting up and closure of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants; a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi.