Structure Of FDI In E-Commerce

October 30, 2016

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In this blog post, Aranya Saha, a student of Jogesh Chanda Chaudri Law College, Calcutta University, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the structure of FDI in the E-Commerce Sector.

Foreign Direct Investment (FDI) is a kind of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing an interest in an enterprise (the direct investment enterprise) i.e. resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long term relationship with the direct investors. The motivation of the direct investor is a strategic long term relationship with the direct investment enterprise to assure the significant degree of influence by the direct investor in the management of the direct investment enterprise. The objectives of direct investment are different from those of portfolio investment whereby investor does not generally expect to influence the management of the enterprise.

FDI in India

Foreign direct investment (FDI) in India is undertaken in accord with the FDI policy which is formulated and declared by the Government of India. The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry and the Government of India issues a “Consolidated FDI Policy” on a yearly basis on March 31 of each year (since 2010) elaborating the policy and the process in respect of FDI in India. The latest Consolidation FDI policy governed by the provisions of the Foreign Exchange Management Act (FEMA) 1993. FDI is prohibited in the listed sectors;

Any kind of lottery business
Atomic energy
Nidhi company
Betting and gambling including casinos
Real estate business
Business of chit fund

Routes for Investment

The Indian economy was considered to be one of the weak and developing economies of the world, but with the changing time, India has witnessed a huge amount of change in its economy during the past years. The Government has taken many initiatives for its development and for the promotions so that foreign investors get more interest and invest in the domestic markets of India. There are basically two routes for the FDIs to invest in India. Namely;

Automatic route
Government approval

The FDIs which are permitted through automatic route can make the investment in a hassle free procedure. They do not require any prior approval of the RBI or the Government before making any remittance. They only need to notify the regional officer of the RBI before 30 days of receipt of inward remittance and submit the necessary documents in that office before the completion of 30 days of issue of shares to foreign investors. Whereas;

Under the FDIs which does not fall under the automatic route require prior Government approval. For this purpose, a body has been incorporated as the Foreign Investment Promotion Board (FIPB) who deals with FDIs which are not permitted under the automatic route. The Indian companies who are permitted to have foreign investment through (FIPS) are not required to get any approval from the RBI. They only need to notify the Regional office of the RBI as being prescribed.

A non–resident, can invest in India, subject to the FDI policy. A citizen of Sri Lanka or entity in Sri Lanka can invest in India under the Foreign Direct Investment policy, only under the Government route. The NRIs residing in Nepal and Bangladesh as well as citizens of Nepal and Bangladesh are allowed to invest in the capital of companies registered in India on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking network. The Overseas corporate bodies (OCBs) are no longer recognised from September 16, 2013, as a class of investment in India. While the OCBs which are incorporated outside India are not under the guidelines of the RBI. Hence they can make a fresh investment under FDI policy with the prior approval of the Government of India if the investment is through Government route and with the prior approval of Reserve Bank of India if the investment is through Automatic route.

FDI in E-commerce

The entities capable of FDI include the E-commerce sectors too. Here E-commerce means the companies or the entities which are incorporated under the Companies Act 1956, or 2013, or a foreign company covered under section 2(42) of the Companies Act 2013 or an office , branch or agency in India covered under section 2(v)(iii) of FEMA, owned or controlled by the person resident outside India and conducting e-commerce. These companies have no personal contact between the buyer and sellers. They conduct their business by means of electronic means. There is mainly two concept of e-commerce namely;

Business to consumer (B2C)
Business to business (B2B)

The term B2C refers to that kind of business where the buyer is the consumer, and the seller is the business. The business houses sell their product directly to the consumers through any kind of electronic means. On the other hand; the term B2B refers to that kind of business where the buyer is the wholesaler or the retailer and the sellers are the manufacturers or the retailer. Here the buyer buys not to consume the product but for the resale purpose.

The FDI policy regarding the e-commerce sectors has always been a concern. In this respect, the ‘Consolidated FDI Policy Circular 2015’ has amended the policy from time to time. In the latest amendment business to business (B2B) e-commerce are allowed up to 100% under the automatic route. The policy has not permitted foreign investments for the business to consumer (B2C) e-commerce. The trade in B2C is allowed only for;

Retail business conducted through mortar stores and brick.
The products are subject to e-commerce retail which are manufactured in India.

The e-commerce entities are solely responsible for the products sold by them. The payments are subject to the strict guidelines by the RBI. The most popular business conducted through e-commerce are Flipkart, Amazon, Jabong, Snapdeal. They are not the manufacturers but they buy from the retail or the manufacturing houses and sell them to the consumers, but they are not allowed to sell more than 25% of the products from a single company or a vendor.

Laws have been provided for the contravention of any FDI regulations on the part of any person. If any person breaches or violates any of the laws, rules, notification issued by the Government of India, FIPB, RBI, he shall upon adjudication be liable to a penalty up to thrice the sum involved where such sum is quantifiable or up to two lakh rupees where the amount is not quantifiable. If the infringement continues then, the penalty may extend to five thousand rupees for every day during which the contravention continues.

References:

http://gradestack.com/Advanced-Certification-in/FDI-in-e-commerce/FDI-in-e-commerce/18712-3311-33256-study-wtw
A book of Economic and Commercial Laws.
http://www.livemint.com/Companies/PNMA1xLNjpVpsDH0KxtDZP/Ecommerce-firms-will-have-to-restructure-businesses.html