GOVERNMENT CLARIFIES THAT 100% FDI IS PERMITTED IN B2C E-COMMERCE MARKETPLACES
30 March 2016
In a much awaited move, the Department of Industrial Policy and Promotion issued Press Note 3 (2016 Series) on 29 March 2016 (PN3) to regulate foreign direct investment (FDI) in the thriving business to consumer (B2C) e-commerce sector. This Ergo summarises the key aspects of PN3, and its potential impact on the Indian B2C e-commerce industry.
Key aspects of PN3
“e-Commerce” has been defined as “buying and selling of goods and services including digital products over a digital and electronic network”. A “digital and electronic network” has been widely defined and includes “any internet applications”.
It has been clarified that 100% FDI is permitted under the automatic route in “marketplace model of e-commerce”. The “marketplace model” has been defined as a model where the e-commerce entity provides an information technology platform on a digital and electronic network to act as a facilitator between buyers and sellers.
It has also been clarified that FDI is not permitted in “inventory based model of e-commerce”. The “inventory based model” has been defined as a model where the e-commerce entity owns the inventory of goods and services which are sold to the consumers directly.
It has been clarified that, among other things, marketplaces are:
provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection (and facilitation of payment in conformity with the guidelines of the Reserve Bank of India (RBI)), and other services; and
facilitate the sale of services, subject to conditions of the FDI policy on the services sector, applicable law, security and other conditions; and
exercising ownership over the inventory (and any warranty/guarantee of goods and services is required to come from the seller);
permitting more than 25% of the sales on their platforms by any one seller or group companies of such seller; and
directly or indirectly influencing the sale price of goods and services (and maintain level playing field).
Potential impact of PN3
PN3 offers much needed clarity on government’s position on the e-commerce industry in India. Pure-play marketplaces will likely construe the move as an impetus for further growth in the sector. However, traditional retailers are likely to view the move as a policy level decision to provide global retailers with a backdoor entry to enter the Indian market.
Since PN3 largely clarifies the position on FDI in marketplaces, it remains to be seen whether Courts seized of marketplace model matters will apply it retrospectively. In any event, PN3 is highly likely to impact the outcome of the ongoing dispute before the Delhi High Court between the traditional retailers and marketplaces which have received FDI.
PN3 also restates the position that sale of products through e-commerce is permitted for: (a) any manufacturer, which manufactures its products in India; (b) an Indian manufacturer, which owns an Indian brand, manufactures at least 70% of its products in house, and sources at most 30% from Indian manufacturers; and (c) a single brand retail entity, which operates through brick and mortar stores in India.
Allowing marketplaces to provide support services to sellers will come as a major relief to the industry.
Permitting facilitation of payments by marketplaces in conformity with RBI guidelines (i.e., as a payment intermediary or through RBI registered payment intermediaries) is a big respite.
The cap of 25% on sales by a seller and its group companies will ensure the broad-basing of sellers and is intended to permit FDI in pure-play marketplaces only. The threshold of 25% is in line with a similar restriction on FDI in wholesale trade. Marketplaces which rely heavily on one or a small number of vendors for sales will likely have to be restructured. Exclusive distributorship arrangements, which were often construed as an indirect means of retailing, are likely to be the most affected and will likely see a substantial overhaul in operations.
The prohibition on influencing the sale price of goods and services will also affect several leading marketplaces. Often, marketplaces with exclusive distributorship arrangements attempt to control pricing of products sold through their platform. The clarification once again indicates the government’s intention to permit FDI in pure-play marketplaces which merely offer a platform for the sale of goods and services. This clarification is likely to have the most visible impact on the e-retail industry. It will be interesting to see how the e-retail industry, which is fuelled with deep discounts, will cope with it.
The definition of “inventory based model of e-commerce” read with the definition of “goods and services” implies that e-commerce entities with FDI cannot “own” and “sell” “digital products” and “services”. This leads to the following issues:
It is not clear whether items like online streaming/downloading of content is covered under the terms “digital product”, and whether any ownership of such content, and making it available to consumers online, is prohibited. In most cases, digital content is in fact licensed to the end user for a specific purpose as against an outright sale of such content, and therefore, in strict legal terms, the impact of PN3 may be minimal.
PN3 also clarifies that “sale of services through e-commerce will be under the automatic route” subject to conditions under the FDI policy on services sector and other applicable laws/conditions. This appears to be an exception to the prohibition on “owning” and “selling” of “services” under the inventory model. However, an express clarification in this respect would help.
PN3 includes “foreign companies” as defined under Section 2(42) of the Companies Act, 2013 and office/branch/agency in India within the definition of an “e-commerce entity”. While an office, branch, or agency implies a presence in India, and therefore, is relevant from a foreign investment perspective, it is unclear how PN3 impacts or is even relevant for a company incorporated outside India even if the goods or services offered by such company online are available in India. Also, LLPs have not been included in the definition of “e-commerce entity”.
PN3 clarifies that any warranty/guarantee in a marketplace model will be the responsibility of the seller (and not the marketplace). This is in line with the provision that the marketplace will not have ownership of the goods. However, in certain recent cases under the Consumer Protection Act, 1986, marketplaces have been held liable to pay damages in relation to products sold by third parties on their platforms in the same manner as a direct seller of goods. It is hoped that the aforesaid requirement under PN3 will provide guidance to Courts and other authorities in deciding such matters.
The definition of “e-commerce” covers sales made over “digital and electronic network” is wide and includes a network of computer, television channels and “other internet applications such as web pages, extranets, mobiles, etc”. It is not clear whether closed networks such as wi-fi based local networks will be covered under this.
PN3 sets out the government’s position on what is permissible in the e-commerce industry. It has now been made amply clear that FDI is permitted only in pure-play marketplaces, and not in inventory based models. The express permission for FDI in marketplaces should definitely increase the investor confidence in the sector, and thereby result in increased FDI flows.
However, there are quite a few aspects that the industry needs to be worried about. We are likely to witness several e-commerce ventures restructuring their business models to fall under the purview of a “marketplace model”. Additionally, as noted above, PN3 also gives rise to newfound concerns, which will need to be further clarified. Key among these are the provisions relating to content through online media and coverage of foreign entities engaged in e-retail in India without any other form of presence in the country
Overall, PN3 is a commendable move. Hopefully, the issues discussed above will be clarified and more positive changes will follow in the times to come.
- Sharad Moudgal (Partner), Abhiraj Krishna (Senior Associate), and Sanjay Khan Nagra (Senior Associate)
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 India Footwear Manufacturers and Retailers Association (AIFMRA) & Ors v Union of India & Ors (WP 7479 of 2015).