By Ananya Banerjee, who is currently pursuing Diploma in Entrepreneurship Administration and Business Laws from WBNUJS.
In accordance with the proposal already placed and the speculations in the market (as already stated in an earlier article regarding FDI in Marketplace Model (Link)), the Department of Policy and Promotion (“DIPP”) has come up with Guidelines for Foreign Direct Investment on E-commerce (“Guidelines”). The Guidelines clarify few things related to e-commerce business.
E-commerce: After the long wait, DIPP has finally come up with a definition of e-commerce. The definition is very general and inclusive and also includes trading in services. The Guidelines state that e-commerce means buying and selling of goods and services including digital products over digital and electronic network. The inclusion of digital and electronic network has covered all field of e-commerce activities.
E-commerce Entity: The Guidelines have also defined e-commerce entities which includes, in addition to Indian companies, foreign companies (as per the definition of Companies Act, 2013) (Link) and branches, offices and agencies provided under Section 2(v)(iii) of FEMA.
Inventory and Marketplace Model: Foreign investment in the inventory model was prohibited as per the DIPP guidelines published in April, 2014, pursuant to which, e-commerce entities like Flipkart, which had foreign investment involved, changed their business model completely and instead of the inventory model, where they were acting as direct sellers, opted for marketplace model, whereby the sellers are provided with the online platform to sell the products. While the entities are still maintaining their inventory in most cases, they are leasing the space to the sellers and are providing services to the direct sellers like warehousing, delivery service, collection of payment etc. There was no restriction in foreign investment in this kind of business model and presently, all Indian e-commerce sites, involving foreign investment and/or interested in attracting foreign investment have taken recourse to this Alibaba business model.
The Guidelines have defined the inventory based model of e-commerce as an e-commerce activity whereby the inventory of goods and services is owned by the e-commerce entity itself and which carries on direct sale, whereas, the marketplace based model of e-commerce has been defined as the providing of an information technology based platform on a digital and electronic network whereby the entity only acts as a facilitator. The definition of marketplace model, no doubt, includes all digital and electronic platforms, including mobile applications.
FDI in E-commerce
The Guidelines have clarified in simple words that no foreign direct investment (“FDI”) is allowed in the inventory model, which was very popular when e-commerce sites first started to operate in the Indian market. However, as expected, DIPP has allowed 100% FDI in e-commerce entities carrying on e-commerce activities through the marketplace model. These clarifications would bring a sigh of relief to all the existing players and the new entrepreneurs interested in entering the market.
DIPP has clarified once again that the manufacturers are free to sell their products manufactured in India through e-commerce retail. With the expansion of market in e-commerce, the manufacturers are, in order to capture a share in the market, increasingly giving importance to online retail. This clarification would further boost their activities. However, this provision would be applicable only on products manufactured in India.
Single Brand Retail Trading (“SBRT”) is permitted to carry on retail trading through e-commerce platforms, provided they are operating through brick and mortar stores. An Indian manufacturer is allowed to sell its single brand products through online retail trading.
The Guidelines have clarified that an Indian manufacturer would be the investee company which is the owner of the Indian brand, and which manufactures at least 70% of the products in India, in house and sources at most 30% from other Indian manufacturers. The percentage would be calculated in terms of value and not in terms of unit. So, retail trade through e-commerce activities can only be carried out for products manufactured in India and by other Indian manufacturers.
The Guidelines have went on to clarify that digital and electronic network would include network of computers, television, mobile, extranet, web pages and any other internet application used in automated manner. So, the term e-commerce shall invariably include the buying and selling conducted through web pages, mobile applications, television and other similar medium. The entities carrying on sale through television channels would also have to adhere to these Guidelines and all other guidelines applicable to e-commerce activities.
The Guidelines have also specified that marketplace model can only carry on B2B activities. Recognition has been given to the services provided by the e-commerce entities like warehousing, logistics services, payment services and other general services provided by them, however, ownership shall not be transferred to these entities.
One important aspect clarified through these Guidelines is that, no single vendor or the group companies of the e-commerce entity shall be permitted to carry on more than 25% of the total sales affected through the platform. This would mean that companies like Flipkart, which sales the electronic products of its group company WS Retail, or of such other substantial vendors, would now have to be careful about the total sale carried on by such vendors and/or companies. Moreover, the companies who had arranged for the marketplace model to carry on the sales of only a handful of products from one or two sellers would not be permitted to involve any FDI anymore.
Provisions of the Guidelines also mandate that the details of the sellers shall be mentioned in the marketplace platform and the final delivery and any warranty policies would be the responsibility of the sellers and not the e-commerce entities carrying on business through marketplace model. The T+2 settlement cycle guidelines issued by the Reserve Bank of India would have to be followed, in case the e-commerce entities manage payments of the sales. The entities would not be allowed to influence the sale price of the products in any manner whatsoever.
The conditions specified under para 22.214.171.124 of the Consolidated FDI Policy, 2015, applicable to the cash & carry wholesale trading would be applicable on B2B e-commerce activities. These conditions specify that
- requisite licenses, registrations or permits as applicable, would have to be obtained;
- the activities can only be carried on with entities (a) holding sales tax/ VAT registration/service tax/excise duty registration; (b) holding trade licenses; (c) holding permits/licence for undertaking retail trade; or (d) having certificate of incorporation or registration;
- full records indicating details of such sell shall be maintained on a daily basis;
- the wholesale trade to group companies would not exceed 25% in aggregate of the total turnover of the wholesale venture;
- the wholesale trader cannot open retail shops to sell to consumers directly.
So, the e-commerce entities engaged in the marketplace model can carry on their trade with sellers fulfilling any of the conditions mentioned under clause (ii) above and not otherwise, and the entities would also have to follow the other conditions specified herein above.
These Guidelines have provided the much-needed recognition to the marketplace model, clarification on FDI Policy and the set of conditions applicable to the e-commerce business. However, the Trade Associations who have always criticized the growth of e-commerce industry would not be very happy about these clarifications and Confederation of All India Traders has already criticized these Guidelines. However, these Guidelines would help immensely in the growth of the e-commerce industry in a regulated manner.