The Ministry of Commerce and Industry has vide Press Note 3 of 2016 series, brought the much awaited clarity for Foreign Direct Investment (FDI) in the e-commerce sector, a move that will bring  relief  to  large  e-commerce companies  like  Amazon, Flipkart and Snapdeal. This ends the uncertainty over the business model being used by India's biggest e- commerce companies which has been challenged in court by brick-and-mortar stores.

Although, retail e-commerce,i.e., business-to-consumer (B2C) is generally not permitted, B2C e-commerce would be permitted under the following three circumstances: (i) manufacturer selling products manufactured in India through e-commerce retail, (ii) single-brand retail trading entity operating through brick and mortar stores and undertaking retail trading through e-commerce route, and (iii) an Indian manufacturer selling its own single brand products, being the owner of the Indian brand and manufacturing in terms of value, at least 70% of its products in- house and sourcing at most 30% from Indian manufacturers.

Before this Press Note was issued, there existed no definition of e-commerce and there was no clear distinction whether an e-commerce business included only trading in goods or also encompassed services within its scope. Majorly, there was a serious lacuna in the previous FDI policy as the different forms of business models were not sufficiently addressed, although there were huge inflows of FDI in this sector.

The Press Note has brought in the much need clarification and defines e-commerce as “buying and selling of goods and services including digital products over the digital and electronic network.” The term 'digital and electronic network' has been stated to include a network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles, etc.

An e-commerce entity is defined as an entity that is engaged in e-commerce activities and fulfills the following conditions:

  1. It is a company incorporated under Companies Act, 2013 or Companies Act, 1956, or
  2. A foreign company as defined under section 2(42) of the Companies Act, 2013, or
  3. An office, branch or agency in India as provided in Section 2(v)(iii) of Foreign Exchange Management Act, 1999 owned and controlled by a person resident outside India.

It is pertinent to note here that Limited Liability Partnership (LLP) have not been specifically included and thus FDI in LLPs is not permissible to undertake e-commerce activities.

The Press Note has further clarified and defined the 'market place model' essentially as the information technology platform provider or facilitator between buyer and seller. Further, 100% FDI through automatic route is permitted in this model of e-commerce.Nonetheless, the Government has disallowed FDI for 'inventory based model' where the inventory of goods and services is owned by the e-commerce entity and provides retail services directly to consumers.

However, the most remarkable change introduced by this Press Note is that in the marketplace models, e- commerce entities cannot 'directly or indirectly influence the sale price of goods or services' and are obligated to maintain a 'level playing field'. This is a huge setback for e-commerce giants, as the rules now prohibit marketplaces from offering discounts and capping total sales originating from a group company or one vendor at 25% and therefore is intended to end the huge discount wars that were seen in recent times.

The policy further clarifies that the responsibility of any warranty/guarantee of products or services sold online, their delivery and customer satisfaction will be borne by the sellers and not the e-commerce company. The new policy also mandates that such e-commerce companies to display contact details of the sellers online and will be allowed to provide support services to sellers on their platform such as warehousing, logistics, order fulfilment, call centre, payment collection and other services.

VA view: The Government's clarification on permissible FDI in e-commerce and definition of marketplace is a welcome move to bring clarity to what constitutes online retail in India. The three restrictions on the marketplace model, namely, maintaining a level playing field vis a vis brick and mortar players, one vendor's share of the volume of trade on the marketplace not exceeding 25%, and post-sales delivery and consumer satisfaction being the responsibility of the seller, is against liberalization of the Indian retail sector.

The restriction on pricing freedom is not warranted. Predatory pricing should be the concern of the anti-trust authorities and not made part of the FDI policy. The obligation to maintain a 'level playing field' could possibly hamper passing on heavy discounts by e-commerce companies to its customers.

As regards the second restriction, it is not clear whether the sale from vendors should be measured on weekly, monthly or yearly sales basis. The second restriction can be circumvented by creating separate organizations in respect of the marketplace provider for transactions which have been prohibited. This will only add to the transaction cost and may not benefit the end consumers at large.

In respect of support and other services, the Press Note is silent on whether advertisement issued by e- commerce companies to attract online customers is permissible as it would indirectly help sellers to increase sales.

Moreover, the immediate application of Press Note has provided no room for compliance with the changes introduced by the Press Note especially for the inventory based e-commerce business.