FDI norms in e-marketplace: Time for inventory-based firms to reinvent themselves?
Poorvi Sanjanwala, Partner, Rajani Associates

The Indian government had thrown open the doors to 100 per cent foreign direct investment (FDI) under automatic route for companies engaged in B2B e-commerce a few years back, but such companies were not permitted to engage in retail trading. Over a period of time, the marketplace concept evolved, with e-commerce companies providing an online platform to sellers and buyers to facilitate retail trading. These companies, which saw enormous inflows of FDI, gave tough competition to brick-and-mortar stores, primarily in the form of deep discounts, endless product options, quicker delivery and exchanges resulting in lower footfalls and drop in sales at offline stores, as the latter were unable to match the deep pockets and sales strategies of e-commerce companies. Offline retailers took their complaints to the government, contending that e-commerce companies were violating FDI norms.

To allay the concerns of the brick-and-mortar retailers and to clarify the concept of "marketplace", specifically from an FDI perspective, the Department of Industrial Policy and Promotion (DIPP) has, on March 30, 2016, issued the much awaited and much needed clarity on the marketplace model in the form of Press Note 3 of 2016. Consequently, 100 per cent FDI under the automatic route has now been permitted in the marketplace model of an "e-commerce entity". The Press Note has also defined "e-commerce", "e-commerce entity" (which includes an Indian company, a foreign company or an Indian office or branch or agency of a foreign entity), "inventory based model of e-commerce" and "marketplace model of e-commerce".

FDI is not permitted in "inventory based model" where an e-commerce entity owns inventory and sells directly to customers. The 100 per cent FDI allowed in an e-commerce entity having a marketplace model comes with conditions attached; the most important ones being the 25 per cent sales restriction by a single vendor/its group companies and the prohibition on the e-commerce entity to directly or indirectly influence product prices.

The Press Note is certainly a welcome move by the government to regulate the marketplace model of e-commerce, a relatively grey and unregulated area as far as the ambit of its activities was concerned. The conditions related to sales and pricing will clear the way for a level playing field not only amongst e-tailers, but also between the e-tailers and the brick-and-mortar retailers – since deep discounts, which had become the norm in e-commerce, would now be more realistic.

Tax related clarifications on e-commerce activities will be required, given that the marketplace model is now defined as e-commerce activity

Bringing a foreign company, a branch, and an agency within the definition of an e-commerce entity has widened the ambit of entities which can engage in e-commerce activities, and expanded the list of recognised entities, other than an Indian company, which can undertake marketplace based e-commerce activity.

However, from an implementation perspective, there are some aspects which are not very clear. These include formal clarifications on the terms and conditions and their adherence, since these would in some manner entail additional compliances by e-tailers; clarity on how and which authority would monitor adherence to the conditions, particularly those related to the influence on the sale price and the 25 per cent cap on sales through a single vendor.

Taxation has been an area of concern for e-commerce companies, especially from an indirect tax perspective. Tax related clarifications on e-commerce activities will be required, given that the marketplace model is now defined as e-commerce activity.

As far as the entities engaged in inventory based e-commerce are concerned, considering that no FDI is permitted in such companies, such entities may have to revisit their business models and make the transition to a Press Note 3 compliant model.

The author is partner at law firm Rajani Associates.

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