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Vaibhav Kakkar & Saurabh Tiwari

FDI norms in e-marketplace: Defining a genuine marketplace while protecting investors

05 April, 2016

The government of India has, by Press Note 3 of 2016, finally clarified its foreign direct investment (FDI) policy on the e-commerce sector, especially on e-marketplaces, thereby ending a long period of regulatory silence and conjectures. This was long overdue, especially since the last round of policy reforms echoed the government’s commitment towards ease of doing business in India and stakeholders were expecting clear guidelines in the e-commerce space as well, with e-commerce becoming a war zone as brick-and-mortar retailers and FDI-backed e-marketplace entities chased the same set of customers.

The Press Note has been issued after a series of consultations with all relevant stakeholders. It also assumes significance in light of the position taken by the Department of Industrial Policy and Promotion (DIPP), that it was the lookout of the financial watchdogs whether to investigate any circumventions of the FDI Policy by e-commerce companies. Such developments had made the foreign investors nervous and the issuance of the Press Note would definitely provide them much-needed respite.

The implementation of the 25 per cent limit on sourcing from a single vendor and the consequential re-structuring of business models by existing players will be interesting to watch

The Press Note introduces explicit definitions of e-commerce, e-commerce entity, inventory based model of e-commerce and marketplace based model of e-commerce. The marketplace model of e-commerce would be open for FDI up to 100 per cent under the automatic route, while FDI is not permitted in inventory based e-commerce. Under the new guidelines, a FDI-funded company can engage in providing an information technology platform, to act as a facilitator between buyers and sellers. However, there are two interesting riders – the marketplace entity will not permit more than 25 per cent of sales from one vendor/ group companies, and such an entity will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field. Clearly, such riders intend to ensure that e-commerce companies operating as marketplaces are genuine marketplaces and no more.

Given the 25 per cent rule, some of the prominent marketplaces may be required to restructure their business models. This move could also be viewed as creating more enhanced choices for end-consumers, as also, protect against monopolistic practices and circumvention of FDI norms on inventory based e-commerce. However, there is still some room for clarity. The 25 per cent would be a function of sales in volume or value? Also, while it seems logical that this parameter would be applicable on a yearly/ financial yearly basis, the Press Note is a bit ambiguous on this. The implementation of this rule and the consequential re-structuring of business models by existing players to fall in conformity would definitely be interesting to watch.

Similarly, the marketplace entities have been prohibited from ‘directly’ or ‘indirectly’ influencing the sale price of the goods or services. One of the biggest reasons for end-consumers to shop online are the discounts offered on marketplaces. Of course, the intent of the government is to provide a level playing field and protect the interests of the brick-and-mortar retailers which do not offer the convenience of ‘click’ shopping. However, it remains to be seen, as to how business tools such as festive coupons and cash-backs will be treated, as also, whether reward (redeemable) points/ discounts offered by credit card companies, among others, would be permitted on online shopping through e-marketplaces. Talking about a level playing field, it should be borne in mind that the concept of reward/ redeemable points is not specific to online shopping, and is used by traditional retailers as well to woo customers.

Further, under the guidelines, marketplace entities have been specifically allowed to provide support services to sellers, such as warehousing, payment collection and logistics. It makes sense in such models, as the marketplace serves as the primary interface with the customers and hence support services complete the loop between the entities involved and enable a better customer experience. The goodwill of the marketplace depends a lot on customer satisfaction and the permission to such entities for support services allows them to be involved in the process. It also promotes efficiency and consumer interest. This is an important aspect as there are a number of stakeholders opposing such marketplaces providing support services, essentially claiming that these services are akin to that of an inventory model. Therefore, the government has indeed taken the right move to clarify its stance on support services. However, such clarification may also have an impact on the various ongoing tax litigations, wherein, on the basis of delivery and warehouses, the state governments have contended for taxability of marketplaces.

To conclude, while FDI in inventory based e-commerce may still be a politically and policy driven issue, which will go concomitantly with the government clarifying its policy on brick-and-mortar retailers, and it remains to be seen when the government bites the bullet on it, the present Press Note is a vital step as it not only removes ambiguity and protects investors, but also emphasises the government’s commitment to induce clarity and consistency in policy.

The Press Note is undoubtedly laudable and a step in the right direction. While the process of financial reforms is inevitably complex and time consuming, policy initiatives such as these send out a strong positive message, and are a must to fulfill the government’s avowed policy objective of 8 per cent economic growth.

Vaibhav Kakkar is a partner and Saurabh Tiwari is a managing associate at Luthra & Luthra Law Offices. The views expressed are personal.


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FDI norms in e-marketplace: Defining a genuine marketplace while protecting investors

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