100% FDI in E-Commerce

As per the extant consolidated foreign direct investment policy of India (“FDI Policy”), foreign direct investment (“FDI”) up to 100% under the automatic route is permitted in Business-to-Business (B2B) e-commerce but not in in Business to Consumer (B2C) ecommerce.

  1. However, vide Press Note 3 (2016 Series) dated March 29, 2016 (“PN 3 of 2016”) issued by the Department of Industrial Policy & Promotion, Ministry of Commerce and Industry (“DIPP”), FDI in B2C e-commerce has been permitted in the following circumstances: A manufacturer is permitted to sell its products that are manufactured in India through e-commerce retail.
  2. A single brand retail trading entity operating through physical shops, is permitted to undertake trading through e-commerce.
  3. An Indian manufacturer is permitted to sell its own single brand products through e-commerce retail. This is subject to the condition that the investee company, which is the owner of the Indian brand should at least (a) manufacture 70% of the value of its products in house and (b) source 30% from Indian manufacturers.

It is pertinent to note that although FDI has been liberalized and allowed in B2C ecommerce activities, it is expected to benefit common man and encourage manufacturers of products in India.

PN 3 of 2016 defines for the first time, certain terms like ‘E-Commerce Entity’, ‘Inventory based model of e-commerce’ and ‘Marketplace based model of e-commerce’ and the earlier definition of ‘E-commerce’ has been modified to broaden its scope and meaning. ‘ECommerce’ has been defined to now mean buying and selling of both goods and services including digital products over digital and electronic network. The erstwhile definition of the term ‘E-Commerce’ in the FDI Policy referred to merely the activity of buying and selling by a company through the e-commerce platform. Further, the revised definition has broadened the sales channel for goods sold to include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles or other channels that may perhaps be introduced in future. 

An ‘E-Commerce Entity’, shall include, besides a company incorporated under the Companies Act, 1956 or the Companies Act, 2013 (“Companies Act 2013”), a foreign company as covered under Section 2(42) of the Companies Act 2013 and also an office, branch or agency in India as provided in Section 2(v)(iii) of the Foreign Exchange Management Act, 1999 that is owned or controlled by a person resident outside India and conducting e-commerce business.

This provision envisages foreign companies setting up shop in India for the purposes of conducting the e-commerce business. PN 3 of 2016 for the first time, distinguishes between two types of e-commerce models; (a) inventory based model and (b) a marketplace based model of e-commerce. This provides a huge relief to the e-commerce companies in India from unicorns to start ups in terms of confirming the validity of their business model that has come under a lot of scrutiny in the absence of any clear guidelines.

‘Inventory based model of e-commerce’ has been defined as an e-commerce activity where inventory of goods and services is owned by an e-commerce entity and is sold to consumers directly. This model is prohibited for companies with FDI.

A ‘marketplace model of e-commerce’ has been defined as providing an information technology platform by an e-commerce entity on a digital and electronic network to act as facilitator between buyer and seller and it is in this model that 100% FDI under the automatic route has been permitted. This clearly limits the role of a marketplace entity to merely providing an information technology platform and acting as a facilitator between buyer and seller. Such entities cannot own the inventory of goods and neither can it invoice the products in its name. Several other conditions have been included in PN 3 of 2016 for market place ecommerce entities (“Entity or Entities”) in which FDI is permitted up to 100% through the automatic route as follows:

  1. These Entities will be permitted to enter into transactions with sellers registered on its platform on B2B basis. In summary, B2B e-commerce will continue as before and the market place model now allows these entities to enter into arrangements with prospective sellers who will be able to offer their products for sale through the market platform to the retail consumer.
  2. They may provide support services to sellers for warehousing, logistics, order fulfillment, call centre support, payment collection and other services. They are only not permitted to engage and sell directly with the retail consumer. 
  3. Such an Entity will not be allowed to own goods that are sold on its platform. The responsibility for delivery of the goods to the consumer and customer satisfaction after sales will remain with the seller/owner of the goods though the Entity may provide warehousing services for storage and logistics support for the delivery.
  4. An Entity will not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies.
  5. The web site of the Entity should clearly provide name, address and other contact details of the seller.
  6. Payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.
  7. The actual seller of the goods will be responsible for the warranty/guarantee of goods and services.
  8. The Entity will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.

Guidelines on cash and carry wholesale trading as given in para 6.2.16.1.2 of the FDI Policy will apply on B2B e-commerce.

The PN 3 of 2016 goes a long way in encouraging the growth of the digital media and e-commerce and the conditions imposed also seem fairly reasonable by providing equal opportunity and conditions for brick and mortar companies and manufacturers who have been complaining of predatory pricing and unfair benefits enjoyed by e-commerce companies. Even the condition relating to avoidance of discounts and providing a level playing field may be welcomed by e-commerce entities that have been burdened with losses and cash burn due to huge discounts on prices to attract customers. Likewise, this condition may also be welcomed by the PE investors who have borne the brunt of losses on account of these entities offering products well below the cost price. Over time, the customers who have been the real beneficiaries of unrealistic prices will learn to pay a fair price for the products.

Overall, PN 3 of 2016 is a well-balanced move by the regulators which not only favour FDI but also products manufactured in India and will largely benefit the Indian market.