FDI in E-commerce – Framework Underway

The Department of Industrial Policy & Promotion (“DIPP”) issued the Press Note No. 3 for 2016 on March 29, 2016 (“Press Note”), through which it has clarified the government’s standpoint on the permissible models of conducting e-commerce in India for such entities who have received foreign direct investment. While the policy still remains unequivocal in prohibiting any entity with foreign direct investment from selling products directly to customer in the e-commerce space, however it brings about clarity on the models under which such sale is not illegal. This Press Note primarily provides a definition to the term “e-commerce” and bifurcates all retail businesses conducted through this mode into:

(a) marketplace model and

(b) inventory based model.

Pursuant to the aforementioned bifurcation, the Press Note clearly permits the former model and categorically disallows the latter. Hence the government through this Press Note has attempted to provide impetus to entities conducting business genuinely though the marketplace model and has taken a strict view against entities which have attempted to bypass existing regulations by using various loopholes and thereby conducting business which is essentially against the spirit of the extant regulations.

The Press Note also reiterates the already permissible exceptions to the regulations whereby any entity, which has received foreign direct investment, is barred from directly selling products to the customers. The exceptions to the same are as below:

1. A manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce without Government approval. An Indian manufacturer being the investee company and the owner of the brand is permitted to sell its own products in any manner, i.e., wholesale, retail, including through e-commerce platforms. Such Indian manufacturer should be the owner of the Indian brand and should manufacture in India, in terms of value, at least 70% of its products in house, and source, at most 30% from the Indian manufacturers.
2. A single brand retail trading entity operating through brick and mortar store, is also permitted to undertake retail trading through e-commerce subject to certain conditions.

E-Commerce

The Press Note defines “e-commerce” to mean buying and selling of goods and services including digital products over digital and electronic network.

Models of E-commerce

Pursuant to bifurcating e-commerce into two (2) models, the Press Note further provides an explanation to the basis of ascertaining each model. Under the inventory model, the e-commerce firm buys, stocks and sells goods, while in the marketplace model, it simply acts as a platform connecting buyers and sellers.

Vendors/Vendor Group- Relevance

Additionally, in the case of an entity conducting business through a marketplace model, a rider has been attached whereby no vendor can account for more than 25% of the sales of a marketplace for an e-commerce entity. For the purpose of this condition, all sales from group companies of a vendor/seller on the marketplace shall also be taken into consideration while computation of the abovementioned cap. The restriction imposed should be read with the cap on wholesale trading of goods to group companies whereby the same should not exceed 25 % of the total turnover of the wholesale venture. Hence the two restrictions read together would mean that, a vendor who whether a group company or an independent vendor of the e-commerce entity cannot account for more than 25% of the sales of the marketplace.

Managing E-commerce sales

Further, the Press Note attempts to provide a clear demarcation with respect to the responsibility of the e-commerce entity and the vendors/sellers. While the e-commerce entity may provide assistance to the vendor/seller in providing support services such as warehousing, logistics, order fulfilment, payment collection etc, the vendor/seller shall be responsible for providing a warranty/guarantee for the goods and services and all activities pertaining to after sale services for the product and all tasks with respect to customer satisfaction. Additionally, the invoice for the products/ services shall provide all details of the vendor/seller.

Introduction of level-playing field

In an effort to address various accusations of unfair pricing followed by the larger e-commerce entities, the Press Note introduces a stipulation wherein its provided that e-commerce entities conducting business via the marketplace model shall not indulge in introducing any schemes, whereby they result in directly or indirectly influencing the sale price of the products/services and thereby ensure the maintenance of a level playing field.

The Government has made its stand with relation to e-commerce models quite clear. While seemingly permitting a marketplace model, the Press Note imposes several restrictions on the marketplace model.

Pursuant to the extant regulations, a number of entities with foreign direct investment incorporated a network of sham companies to circumvent the regulations to enable them to conduct business to customer sales. The introduction of a cap on the permissible volumes from a single vendor/seller or their group companies shall definitely have an impact on several such existing e-commerce companies, as some of the biggest players of the e-commerce market attribute majority of their sales to a particular vendor or group of vendors which are in reality some of the sham companies incorporated by such e-commerce entities. Hence by the introduction of the cap, the government has successfully addressed this circumvention of regulations by certain e-commerce entities.

LLP and E Commerce

Further, while the Press Note covers companies, branch offices, agency etc under the purview of “e-commerce entity”, it is silent on the status of entities conducting e-commerce business through the limited liability partnership status. In the recent months, government has made several amendments in the extant foreign direct investment regulations whereby sectoral limitations for a limited liability partnership to accept foreign direct investment in several sectors has been brought under the automatic route. However, the specific exclusion of limited liability partnership from the purview of e-commerce entity indicates that the government may not be entirely convinced on the capacity of a limited liability partnership to conduct an e-commerce business.

Another important concept introduced by the Press Note is the restriction whereby “undue influence” on the pricing of the products/services is prohibited. It is popular knowledge the biggest drivers for an e-commerce business is the discounts and advantageous pricing model followed by such business. A restriction imposed in this regard will definitely have an impact on the sales figures/business of the e-commerce business. Additionally, the terms “undue influence” and “level playing field” are highly ambiguous and contentious in nature and will definitely give rise to a lot of speculation and litigation.

In light of the above, we can conclude that though the Press Note has achieved success in bringing about clarity with respect to the existent confusion, the introduction of multiple riders on the permitted e-commerce entities conducting business through the marketplace model have given rise to several debatable positions. The DIPP will need to issue several clarifications to put to rest the chaos that certain aspects of the Press Note have created in the e-commerce industry.

A copy of the Press Note can be accessed at http://dipp.nic.in/English/acts_rules/Press_Notes/pn3_2016.pdf

– Rashmi Raveendran