GOVERNMENT OF INDIA ISSUES CLARIFICATIONS ABOUT FOREIGN DIRECT INVESTMENT IN E-COMMERCE SECTOR IN INDIA

The Ministry of Commerce and Industry, India has recently issued certain updates and clarifications on 26.12.2018 regarding foreign direct investment (FDI) in various models of e-commerce sector in India.

The Ministry further clarified that as per the FDI Policy 2017, e-commerce entities in India can engage only in business to business (B2B) e-commerce and not in business to consumer (B2C) e-commerce. This implies that FDI is allowed only when the e-commerce entity acts as an information technology platform connecting the buyer and the seller to facilitate purchase and sale of products between them (Marketplace-based Model of e-Commerce), but FDI is not permitted in case the e-commerce entity owns the inventory of goods and services and sells them to consumers directly (Inventory-based Model of e-Commerce).

These clarifications have been issued in light of recent events where it has been noticed that a number of e-commerce entities in India have been selling goods owned by them to consumers to earn higher margins. For instance, as per various newspaper reports, Amazon Basics by Amazon, Perfect Homes, MarQ and others by Flipkart and other such self-owned brands have been reportedly sold by the respective e-commerce entities.

The clarifications further state that 100% FDI is permitted only in Marketplace-based Model of e-Commerce and not in Inventory-based Model of e-Commerce.

Therefore, the e-commerce entities are prohibited from engaging in the following business model, failing which, it would render such business into Inventory-based Model of e-Commerce:

It cannot exercise ownership or control over the inventory of goods of a vendor registered with the e-commerce website

It cannot allow more than 25% purchases of such vendor from the particular e-commerce marketplace

It cannot allow an entity to sell goods and/or services through its e-commerce platform if the e-commerce entity or its group company has an equity participation in such entity

Therefore, the e-commerce entity can only engage in Marketplace-based Model of e-Commerce, wherein:

The details of the vendor have to be clearly specified

The vendor would be responsible for the delivery of goods and/or services, after sales services, warranty/guarantee of goods and/or services sold, etc

The e-commerce entity would not be able to influence the sale price of the goods and/or services sold by vendors registered with the e-commerce entity

The e-commerce entity may provide services of logistics, warehousing, advertisement/ marketing, payments, financing etc to vendors registered with the e-commerce entity

The e-commerce entity may provide fair and non-discriminatory cash-backs to buyers

The e-commerce entity cannot mandate any vendor registered with it to sell its products exclusively on its platform

Thus, the Government of India has directed all e-commerce entities in India to comply with the said FDI Policy in accordance with the clarifications, by 01.02.2019. But various entities such as Amazon, Walmart owned Flipkart, etc may seek extension of the said deadline of 01.02.2019 for implementing the updates under FDI Policy, whereas, other retailers such as Snapdeal have welcomed these updates in the FDI Policy stating that this would help to protect the interests of small and medium sized enterprises and independent sellers who form the majority of vendors on e-commerce websites.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer