FDI in LLPs permitted. Are private limited companies still the better route?
FDI in LLPs permitted. Are private limited companies still the better route?

FDI in LLPs permitted. Are private limited companies still the better route?

This article is written by Priyanka Kansara,  a student of NLU, Jodhpur, during her internship with iPleaders.

 The E-commerce platform is not a privilege, but rather a necessity for the liberalization in the Economic Market in India. The only reason behind Government’s denial to ease the FDI Policy in E-commerce is that the Government wants to promote the Indian Manufacturing Policy such as Make in India before opening up B2C e-commerce to foreign retailers. India has a unique place in the race of World economies and as per the Confederation of India Industry (CII), India should ease the FDI Policy for the E-commerce Industries. In the Month of November, the CII had entered into an Agreement with the Global provider of cloud-based e-commerce marketplaces CloudBuy.[1] The portal can support the range of payment methods now needed by Indian businesses. As per CloudBuy CEO Lyn Duncan, It is an e-commerce platform for the future, which will enable secure business over the web and a transition to online payments. Similarly as per CII the platform will enable secure e-commerce for organisations of all sizes and will speed the growth in online business-to-business transactions; it has the potential to substantially increase trade between our members and around the globe.

The Indian e-commerce industry is in dire need of Capital. India has the potential to become one of the largest markets for e-commerce. By restricting entry of foreign capital, technology and expertise, government is scuttling the growth of the industry. FDI in India is regulated under Foreign Exchange and Management Act 1999, which is related to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.[2] Currently, FDI Policy in India restricts e-commerce companies from offering services directly to retail consumers and 100 per cent is allowed only in Business- to- Business (B2B), which means India does not allow FDI in B2C e-commerce but allows 100 per cent FDI B2B segment. As per the FDI Policy Circular 2015, E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to ecommerce as well.[3]  As per the words of the Hon’ble Minister of Commerce and Industry Ms. Nirmala Sitharaman, e-commerce strictly means you just create the portal, where a buyer and a seller come together but you (the companies) are not finishing off with that, you are also holding stocks of one seller or many sellers.

Judicial Scrutiny for the violation of FDI Policy in E-commerce Market 

“Prima facie, the Union of India/ State Government cannot, on the one hand, for the purpose of tax, treat such sales as retail and on the other hand, for the purpose of investment, not treat the same as retail sale”, the statement by the Hon’ble Justice Rajiv Sahai Endlaw, while dealing with the petition by the All India Footwear Manufacturers and Retailers Association (AIFMRA) for seeking the clarity on FDI norms for Online Market, created a confusion around the e-commerce market and FDI Policy in India.[4] The AIFMRA had contended that alleging violation of foreign direct investment (FDI) norms by online marketplaces such as Flipkart and Amazon, which have attracted billions of dollars in overseas funding. The argument on behalf of the Association is that E-commerce Market places are retailers, because they accept payment, make deliveries, take returns, and make refunds. Merely there being a physical retailers behind the transaction does not convert the transaction into B2C model having no ecommerce element.

Recently in the Month of November, the Confederation of All India Traders (CAIT) had also raised similar questions in a complaint sent to the Ministry of Commerce and Industry. The CAIT has opposed entry of FDI in any segment of retail and has urged the Government to frame a ‘National Trade Policy’ for retail to provide better business opportunities to the Indian retail sector; as the Domestic traders are fearful as to allowing the FDI in E-commerce without any Policy will enhance the risk of India’s being a dumping yard for the Global Online Market giants. It’s also in favour of a clear policy and guidelines on e-commerce on the lines of the USA, the UK, the European Union and China, among others. The letter singled out Flipkart, Amazon, and Snapdeal for violating FDI regulations while offering huge discounts during the festive seasons also. E-commerce players such as Snapdeal, Flipkart, and Amazon have adopted a market place whereby they provide a platform for retailers and distributors to sell products to customers.

Some specific issues arises while analysing the alleging violation of foreign direct investment (FDI) norms by online marketplaces such as taxation, value added taxes, and bringing them under the ambit of local body taxes. On the same footing, the Kerala High Court had admitted a petition from the Mobile Retailers’ Association that accused of e-commerce firms including Amazon, Flipkart, and Snapdeal of FDI violations, alleging that e-commerce firms enter into exclusive bulk deals with manufacturers to sell their Mobile phones and such strategies would wipe out traditional sellers.[5]

Retail Trading, in any form, by means of e-commerce, would not be permissible for Companies with FDI, engaged in the activity of multi brand retail trading, as well as Single brand retail trading, the Foreign Investment of which is aimed at attracting investment in production and marketing, improving the availability of such goods for the consumers. The efforts of many of the Foreign as well as Indian E-commerce firms like yebhi.com or fashioforyou.com to make the case for allowing FDI in this sector did not bear fruit. But it would be helpful in the creation of a more transparent funding structure for domestic players and offer easier access to capital.

Conclusion: we need a proper and Regularized National Trade Policy

 The debate over whether India would open up B2C e-commerce to FDI has been long and often bitter. The Commerce Ministry’s discussion paper last year listed objections it received from a national body of traders to open up B2C e-commerce to FDI i.e. allowing FDI in e-commerce will provide such players enormous geographical reach and this will be against the spirit of FDI in multi-brand retail which is restricted to cities with more than a million people etc.

E-Commerce in India, unlike in Foreign Jurisdiction, has a different scenario; it has all the advantages of profit-making and commercial viability but is neither regulated by any dedicated e-commerce law nor is it contributing towards the economic and social growth in India. The Government should ensure with the solid FDI Policy to enable a fair Market environment, which can create a healthy competitive environment and can ultimately benefit to the consumers and Government revenues.  For that, we’ll have to wait for some time, but ultimately systema of FDI Policy is a most important phenomenon to be development for the up-liftment of e-commerce in India.

Non-regularization can cause discrepancies in certain other Legal provisions such as Taxation Policies; along with the FDI, taxation is a key consideration impacting e-retailers’ business model, operational strategies and future growth. Lack of physical boundaries and the intangible nature of operations create several taxation issues at each stage of e-commercialization.

Another negative factor as to increment in the unemployment; in India, where small time businesses and kirana store are the largest source of the employment; lack of regularization in the opening of Business to Consumer (B2C) e-commerce can cause negatively impact on the SMEs etc.

[1] CloudBuy ties up with CII for online e-commerce gateway, Business Standard, November 16, 2015, http://www.business-standard.com/article/pti-stories/cloudbuy-ties-up-with-cii-for-online-e-commerce-gateway-115111600636_1.html (accessed on December 2, 20115).

[2] Foreign Exchange Management Act, (1999 no. 42 of 1999; enforced on 29th December, 1999), http://finmin.nic.in/the_ministry/dept_eco_affairs/capital_market_div/fema_act_1999.pdf  (accessed on December 2, 2015).

[3] Consolidated FDI Policy 2015 (effective from May 12, 2015), Department of Industrial Policy and Promotion Ministry of Commerce and Industry Government of India, http://dipp.nic.in/English/policies/FDI_Circular_2015.pdf (accessed on December 12, 2015).

[4] Delhi HC says e-tailers seem to breach FDI rules, Business Standard, September 24, 2015, http://www.business-standard.com/article/companies/delhi-hc-says-e-tailers-seem-to-breach-fdi-rules-115092301392_1.html (accessed on December 2, 2015).

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