IP Connect

India: 100% FDI Permitted in E-Commerce Retailing

New Delhi                                                                                         March 29, 2016

On Tuesday, March 29, 2016, a major development took place regarding the Foreign Direct Investment (FDI) policy and the e-commerce sector in India. As reported by leading Indian newspapers like The Hindu and The Times Of India, the Government of India clarified its position on FDI in the e-commerce sector, that is, a market-place where buyers deal with sellers directly in the absence of any physical infrastructure. The Government has permitted 100% FDI in the market-place format of e-commerce retailing through the automatic route in an attempt to increase foreign investment in the e-commerce sector. The clarification came in the form of a press note titled ‘Guidelines for Foreign Direct Investment (FDI) on E-Commerce’ issued by the Department of Industrial Policy and Promotion (DIPP) on FDI in online retail models to support the aforementioned move of the Government. This is a much welcome move as it would encourage foreign investment and foreign exchange inflows and act as a catalyst in the growth journey of the nation.

As reported by us in our earlier newsletter dated February 15, 2016 (Volume VIII, Issue No. 07) which can be accessed here, the DIPP had replied to the Delhi High Court stating that e-commerce websites are not recognized in the FDI policy of India, meaning thereby that no FDI would be permitted for any company that is engaged in multi-branding retail in the e-commerce sector. As per the Consolidated FDI Policy Circular 2015 (FDI Policy) released by the DIPP earlier, 100% FDI was allowed only in the business-to-business (B2B) model and not the business-to-consumer (B2C) model or retail trading through the automatic route.

The Government’s latest move removed the barrier on 100% FDI in e-commerce retail trading/B2C model in the following cases:

• Where a manufacturer sells its products manufactured in India through e-commerce retail.
• Where a single brand retail trading entity, operating via brick and mortar stores, undertakes retail trading through e-commerce.
• Where an Indian manufacturer sells its own single brand products through e-commerce retail. Here, it was clarified that an Indian manufacturer would be the investee company that is the owner of the Indian brand and manufactures in India a minimum of 70% of its products in-house and sources a maximum of 30% from Indian manufacturers.

In order to bring clarity, the DIPP came out with the definition of the following terms:

• E-Commerce - The buying and selling of goods and services including digital products over a digital and electronic network.
• E-Commerce Entity - A company incorporated under the Companies Act, 1956/2013 or a foreign company covered under Section 2(42) of the Companies Act, 2013, or an office, branch or agency in India as per Section 2(v)(iii) of the Foreign Exchange Management Act, 1999, owned or controlled by a person who is resident outside India.
• Inventory-Based Model of E-Commerce - An e-commerce activity where the inventory of goods and services is owned by an e-commerce entity and is sold to consumers directly.
• Market-Place Model of E-Commerce - The providing of an IT platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyers and sellers. A market-place entity will be permitted to enter into transactions with sellers that are registered on its platform on a business-to-business basis, the DIPP added.

  The DIPP came up with a few conditions as well which are as follows:

• Digital and electronic networks will include all networks of computers, TV channels and internet applications used in an automated manner like web pages, mobiles etc.
• Market-place e-commerce entity will be permitted to enter into transactions only with sellers registered on its platform on a B2B basis.
• E-commerce market-place will cover areas like support services to sellers regarding warehousing, logistics, order fulfillment, call center services, payment collections etc.
• E-commerce entity providing a market-place will not exercise ownership over the inventory (goods purported to be sold). An ownership of the inventory will convert the business into an inventory-based model.
• E-commerce entities will not be permitted to sell more than 25% of the sales made through its market-place from one vendor or their group companies.
• For goods and services being made available for sale electronically on websites in a market-place model, the name, address and contact details of the seller will have to be provided. Delivery of goods to customers, post-sales and customer satisfaction will be the responsibility of the seller itself.
• The payments received for sales in the market-place model, payments for sale will be facilitated by the e-commerce entity conforming with the guidelines of the Reserve Bank of India. 
• Any warrantee or guarantee of the goods and services sold in the market-place model will be the responsibility of the seller.
• E-commerce entities providing a market-place will not directly or indirectly influence the sale price of goods or services and will have to maintain a level playing field.

100% FDI under the automatic route is only permitted in the market-place model of e-commerce and not yet in the inventory-based model of e-commerce. The online market-place has already witnessed huge foreign investments by global players as well as homegrown players operating in the market-place.  Also, a result of this development would be that foreign firms will now be able to set up e-commerce companies without an Indian partner and homegrown companies will now be capable of being owned completely by foreign firms.

However, a direct repercussion of the abovementioned conditions is that the e-commerce entities will not be allowed to directly or indirectly influence the sale price of goods or services and will have to maintain a level playing field. This could end up in such entities not being able to provide its customers huge discounts and offers on goods including digital and electronic items anymore or end the days of jaw-dropping discounts on electronics like smartphones and televisions. As a result, online prices will come to be on par with the neighbourhood retailer offers. Further, advertising openly about big sale days may also not happen. This would call for a big change in the existing business model, said Mr. Kishore Biyani, CEO of Future Group, running the country's largest brick-and-mortar retail company. What is yet to be seen is the consumers’ reaction to such a move resulting in the end of discount-induced binge-shopping and the corresponding effect of the same on the e-commerce entities. The above mentioned decision is stated to have come into effect immediately from March 29, 2016.

The aforementioned guidelines can be accessed here.