FDI in e-commerce

The Department of Industrial Policy and Promotions has issued Press Note 3 of 2016 dated March 29, 2016 under (“Press Note”). The Press Note is applicable on e-commerce entities incorporated in India.  This post provides a brief on the Press Note, along with certain issues that are perceived to arise in its context.

 

Definitional highlights

The Consolidated FDI Policy, 2015 (“FDI Policy”) refers to the activity of buying and selling through e-commerce platform in the context of FDI in retail trade. This definition appears to be geared towards covering “goods” within its ambit as opposed to “services”, primarily due to its references to retail trading.

In contradistinction to the FDI policy, the Press Note defines e-commerce as the business of buying and selling goods and services including digital products over digital and electronic network. The definition of “digital and electronic network” includes network of computers, television channels and other internet application used in automated manner such as web pages, extranets, mobiles, etc.

The Press Note, though, does not define the term “digital products”. Now, would one understand digital products to mean only goods, remains an open issue. This, however, is important because compliances under the FDI Policy and/or the Press Note would apply on the basis of classification of the offering as a “digital product”.

Paragraph 3 of the Press Notes provides that sale of services through e-commerce will be under automatic route but is silent on applicable compliance that are required to be met. Hence, a clarification from DIPP in relation to the classification of “digital products” may be warranted.

FDI in Marketplace Based Model of e-commerce

The Press Note allows 100 percent FDI in such e-commerce entities that facilitate sale and purchase of goods and services. Such transactions should occur between the buyer and the seller through an Online Platform. However, such entities are barred from maintaining inventory by way of ownership.

Distinction between Inventory-based model and Marketplace-based model

Section 2.1 of the Press Note defines certain critical terms and explains the difference between Inventory-based model and a Marketplace-based model as under:

  • Inventory-based model of e-commerce would mean an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly (what would be inventory of services appears to be an open issue)
  • Marketplace-based model of e-commerce would mean providing an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. In addition, the term Marketplace-based model also includes support services to sellers with respect to warehousing, logistics, order fulfilment, call center, payment collection and other services

 

Therefore, as per the definition provided in the Press Note, a Marketplace-based model (think Amazon) means that the e-commerce entity would be providing a platform for customers to interact with select number of retailers. In such cases the product is actually sold by the seller to the customer. In contrast, the main feature of an Inventory-based model is that the customer is actually purchasing goods (and services!) from the e-commerce entity itself.

Permissible and Impermissible activities

From a definitional standpoint therefore, while maintenance of inventory is specified as an impermissible activity, support services, such as warehousing, logistics, order fulfilment, etc. have been specified to be permissible.

In addition to the above, the following activities have been disallowed to an e-commerce entity with FDI:

  • Influencing the sale price: Marketplace-based Entities have been prohibited from influencing the sale price of the goods and services offered on the Online Platform by the Sellers. This has ostensibly been done to put an obligation on the Marketplace Entities to maintain a level playing field. At a more granular level, this appears to disallow underwriting the minimum sales prices, offering discounts over and/or above what is offered by the sellers/retailers or offer ‘cash-back’ to sellers and/or absorbing losses. However, the Press Note does not specify a criteria for determining the sale price / the minimum sale price
  • Super Seller: The Press Note prohibits a single seller or its group companies from contributing to more than 25 percent of the sale of goods/services through an Online Platform.

 

The Press Note also provide for the seller liabilities. It has been provided that: (a) any warranty/guarantee of goods and services sold will be the responsibility of the seller; and (b) Post sales, delivery of goods to the customers and customer satisfaction will be the responsibility of the seller. Therefore, an e-commerce entity is absolved of any legal liability in relation to the goods and/or services provided to the customer and the seller bears the primary responsibility.

Compliance

Marketplace-based entities are required to list the name, address and contact details of the sellers.

In Conclusion

The Press Note leaves certain grey areas to be ironed out, such as the interpretation of “sale price” in the context of influencing of such prices by the e-commerce website.  In addition, it does not specify if those entities, which have already secured FDI would be covered within the ambit of the Press Note (though from an implementation perspective, it appears clear that such entities would be sought to be brought in within the ambit of the Press Note.  There are several structural and transactional changes that the e-commerce entities currently operating in the Indian space may have to introduce to their operations in India on account of the Press Note. Further, almost all start ups would need to pay close heed to the Press Note in designing their operations on a going forward basis. 

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