Foreign Direct Investment in e-commerce entities

Foreign Direct Investment in e-commerce entities

E-commerce is an entity which provides a platform for suppliers and buyers to buy and sell products. Today various e-commerce entities are operating such as Amazon, Myntra, Flipkart, etc. E-commerce is a growing domain and has brought the entire world into one network. In India as well, e-commerce is flourishing every single day. Though the ratio of trade through e-commerce platforms to entire retail trade is very less, however, this ratio is increasing rapidly. 

Therefore, e-commerce entities are new businesses which foreign investors are exploring to park their funds. However, before making investments, FDI rules are to be checked that whether an investment in these entities comes under an automatic approval route or prior approval is required to be obtained from RBI or Central Government.

Detailed provisions related to Foreign Direct Investment are given in the Consolidated FDI Policy issued by the Department for Promotion of Industry and Internal Trade. In this article, a detailed discussion is carried out related to FDI in e-commerce entities and related terms and conditions.

1. Definition of e-commerce and e-commerce entity

  1. E-commerce: E-commerce means buying and selling of goods and services including digital products over digital & electronic networks. E-commerce platforms do not operate only for goods but also for services such as UrbanClap, Upwork, etc.
  1. E-commerce entities: E-commerce entity means any of the following entities conducting e-commerce business:
    • the company incorporated under the Companies Act, 1956 or 2013; or
    • a foreign company covered under the Companies Act, 2013 or 
    • an office, branch, or agency in India owned or controlled by a person resident outside India.

2. E-commerce models

Consolidated FDI policies discuss about following two modes of an e-commerce business:

  1. Inventory-based model of e-commerce: Inventory based model of e-commerce is when the inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly. 

Therefore, in this model, an e-commerce operator buys products, keeps them in his stock, and sells them directly to the customers. E-commerce operators manage the entire logistic. Profit and loss on sales and purchase of product is bear by the company.

Alibaba is running on an inventory-based model.

  1. Market-based model of e-commerce: Marketplace based model of e-commerce means providing an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

In such a model, the seller sells his product directly to the customer and the e-commerce platform gets his commission, warehousing fee, shipping fee, and fee for other services. Profit and loss on the sale of goods belong to the seller and not the e-commerce operator. 

In India, most of the renowned e-commerce entities are running on a market-based model.

3. FDI Permitted in e-commerce entities

Sector% of FDI PermittedRoute of Approval
E-commerce sector100%Automatic Route

4. Conditions of making FDI in e-commerce entities

100% FDI is permitted under the automatic route of approval subject to the following terms and conditions:

  1. FDI is not permitted in the inventory-based model of e-commerce.
  1. E-commerce entities would engage only in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce. That means the e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis. 
  1. Digital & electronic networks will include networks of computers, television channels, and any other internet application used in an automated manner such as web pages, extranets, mobiles, etc.
  1. E-commerce entities may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call center, payment collection, and other services.
  1. E-commerce entities operating on a marketplace-based model will not exercise ownership or control over the inventory i.e. goods purported to be sold. Such ownership or control over the inventory will render the business into an inventory-based model. Further, the Inventory of a vendor will be deemed to be controlled by an e-commerce entity if more than 25% of purchases of such vendors are from the e-commerce entity or its group companies.
  1. The following entities are not allowed to sell its products on a platform run by an e-commerce marketplace entity:
    • An entity wherein such e-commerce entity or its group companies are having equity participation; or
    • An entity, an inventory of which is controlled by e-commerce marketplace entities or its group companies.

Entities will not be permitted to sell its products on the platform run by such e-commerce entities.

  1. In the marketplace model, goods or services made available for sale electronically on e-commerce platform should clearly provide the name, address, and other contact details of the seller. All Post sales related services, delivery of goods to the customers, and customer satisfaction will be the responsibility of the seller. Like this, the Amazon platform clearly provides the name and other details of the seller when a customer clicks on the product details. Also, the invoice received along with the parcel is issued by the seller not Amazon.
  1. In the marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.
  1. In the marketplace model, any warranty/ guarantee of goods and services sold will be the responsibility of the seller as goods are sold by the seller. E-commerce entities merely facilitate ancillary services.
  1. E-commerce entities providing a marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field. The sales price is solely decided by the seller. 
  1. Services should be provided by an e-commerce marketplace entity or other entities in which the e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors on the platform at arm’s length and in a fair and non–discriminatory manner. Such services may include fulfillment, logistics, warehousing, advertisement/ marketing, payments, financing, etc. 
  1. Further, Cashback and other rewards provided by group companies of marketplace entities to buyers shall be fair and non-discriminatory. For the purposes of this clause, the provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.
  1. e-commerce marketplace entities will not mandate any seller to sell any product exclusively on its platform only.
  1. E-commerce marketplace entities with FDI shall have to obtain and maintain a report of the statutory auditor by 30th September of the following year for each financial year confirming compliance with the e-commerce guidelines.

Subject to the conditions of FDI policy on the services sector and applicable laws/regulations, security, and other conditionalities, the sale of services through e-commerce will be under an automatic route.

5. FDI policy for e-commerce wholesale trading entities

  • Wholesale trading means selling goods or merchandise to retailers, commercial, industry, institutional, and professional business users, and related subordinated service providers. It implies sales for the purpose of business, trade, or profession and not for personal consumption.
  • The following Guidelines on cash and carry wholesale trading (WT) will apply on B2B e-commerce:
    • For undertaking WT, requisite licenses/registration/ permits under the relevant Acts/Regulations/Rules/Orders should be obtained.
    • Except in the case of sales to the Government, sales made by the wholesaler would be considered as ‘cash & carry wholesale trading/wholesale trading’ with valid business customers, only when WT are made to the following entities:
      • Entities holding applicable tax registration; or
      • Entities holding trade licenses i.e. a license or registration under the Shops and Establishment Act, issued by a Government Authority reflecting that the entity/person holding the license or registration is himself engaged in a business involving commercial activity; or
      • Entities holding permits/licenses etc. for undertaking retail trade (like tehbazari and similar licenses for hawkers) from Government Authorities/Local Self Government Bodies; or
      • Institutions having a certificate of incorporation or registration as a society or registration as a public trust for their self-consumption.

Note: An entity, to whom WT is made, may fulfill any one of the 4 aforesaid conditions.

  • Full records indicating all the details of such sales like name of the entity, kind of entity, registration number, amount of sale, etc. should be maintained on a day-to-day basis.
  • WT of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture.
  • WT can be undertaken as per normal business practice, including extending credit facilities subject to applicable regulations.
  • A wholesale/cash & carry trader can undertake retail trading, subject to the conditions as applicable. An entity undertaking wholesale/cash and carry as well as the retail business will be mandated to maintain separate books of accounts for these two arms of the business and duly audited by the statutory auditors. Conditions of the FDI policy for wholesale/cash and carry business and for retail business have to be separately complied with by the respective business arms.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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