In Press Note No. 3 released on 29 March 2016 the Government of India (Ministry of Commerce & Industry, Department of Industrial Policy and Promotion) announced that foreign direct investment (“FDI”) of up to 100% would be permitted under the automatic route in the marketplace based model of e-commerce in a move that is expected to boost foreign investment in the e-commerce space.

Previously, the Government of India had permitted FDI in business to business e-commerce but had not permitted FDI in business to consumer e-commerce except in a limited number of circumstances.

The new rules state that:

  • FDI of 100% is permitted in the “marketplace based model of e-commerce” under the automatic route, i.e. without the prior approval of the Government of India. The marketplace model of e-commerce is defined as the provision of an information technology platform by an e-commerce entity to act as a facilitator between a buyer and a seller.
  • FDI is not permitted in the “inventory based model of e-commerce”, which is defined as an e-commerce activity where inventory of goods and services is owned and sold to consumers directly by the e-commerce entity. However, this is subject to a few limited exceptions, namely:
    • a foreign single brand entity operating through brick and mortar stores in India is permitted to undertake retail trading through e-commerce;
    • a manufacturer is permitted to sell its products manufactured in India through e-commerce retail; and
    • an Indian manufacturer with FDI is permitted to sell its own single brand products through e-commerce retail.

Notwithstanding the relaxation in the rules for FDI in e-commerce, there are a number of conditions that apply in order to benefit from the new rules, namely:

  1. the e-commerce entity will only be able to enter into transactions with sellers registered on its platform on a business to business basis;
  2. the e-commerce entity providing a marketplace, must not exercise ownership over any inventory, otherwise it will be considered to be conducting the inventory based model of e-commerce;
  3. in order to be a true marketplace the e-commerce entity must not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies;
  4. the e-commerce entity must not directly or indirectly influence the price of goods or services, which will have an impact on online companies financing discounted pricing;
  5. goods and services made available for sale on the website should clearly provide the name, address and other contact details of the seller. Delivery of goods and services as well as any warranties/guarantees relating to the goods and services must be the responsibility of the seller.
  6. The e-commerce entity may provide support services in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services and may assist with facilitating payments for sale, subject to further guidelines issued by the Reserve Bank of India.

The announcement has been welcomed by e-commerce players looking for further clarity in the e-commerce space in India. However, existing e-commerce providers will have to review their operations to ensure that they comply with the new rules.