The marketplace of controversies - clarity or more confusion

India is at the threshold of economic growth and development. In particular, great promise is seen in the growth of the digital or e-commerce business in India.

As per the Deloitte ASSOCHAM Report:

“The e-commerce sector in India has become 4 times its size, from USD 3.8 billion in 2009 to USD 17 billion in 2014, growing at a CAGR of 37%. The sector is expected to cross the USD 100 billion mark within the next five years, contributing over 4% to India’s GDP.”

Incidentally, difference in thinking process of certain segments and some amount of chaos also prevails. There appears to be a definite conflict between the modern electronic way and the time tested “brick and mortar” way of conducting business. Consider the example of the litigation initiated by a body of brick and mortar business supported by industry association before the Delhi High Court (Delhi HC).

Essentially, the conflict in this writ petition is regarding the use of electronic platform for conducting retail sales compared to the brick and mortar shops selling these products.

The primary contention by the petitioners in the writ petition is that the so called “marketplace model” is actually allowing the companies to undertake retail sales to “end consumers” and hence violating the Foreign Direct Investment (FDI) norms when such companies receive FDI. The Delhi HC has also seen prima facie merit in this contention, largely because some of the State Governments are treating such sales through marketplaces as sales by retailers and have raised tax on such marketplace operating entities.

The petitioners in this litigation unfortunately allege that the Government of India is responsible for this uncertainty, indicating that there are flaws in the business policy and FDI policy of the country. It is our view that in this attempt, the petitioners are failing to realise the constant evolution of the methods of doing business, especially so in a digitally connected world. The petitioners also fail to recognise that a policy is expected to provide a stepping stone or a guideline and cannot cover the entire gamut of any business.

The counter affidavit filed by the Department of Industrial Policy and Promotion, Government of India (DIPP) that is also a respondent in this writ petition, is an attempt to set out its position so far as the policy making function of DIPP and the Government of India is concerned.

In its counter affidavit, DIPP has inter-alia stated that:

  • The “marketplace model” is not recognised in FDI Policy;
  • It is up to the financial watchdogs to investigate whether there has been any violation of FDI rules; and The review of FDI policy is an on-going process and significant changes are made in the FDI policy regime from time to time to ensure that India remains an attractive investment destination.


The provision of brick and mortar shops or office premises is completely a different subject matter compared to trading in goods (whether on a

wholesale or retail basis). Hence, it may not be accurate to see both the businesses with the same regulatory perspective. The writ petition unfortunately tries to mix the two and blames the Government of India for framing ambiguous policies. The matter remains sub judice as the Delhi HC is yet to pronounce its verdict in the matter and also, certain agencies like the

Enforcement Directorate are yet to complete their investigation of individual cases where a violation could have crept in. Currently, it is our view that one should wait and watch the developments before taking any decision in the matter.

However, the counter affidavit filed by the DIPP should for the time-being assuage the fear in the investor community with respect to the Government of India’s aversion to any particular model of conducting business. The forensic analysis of such business being in compliance with the regulations is a different issue, one that is true for any other sector as well.

Ketan Kothari (Director), Rabindra Jhunjhunwala (Partner) and Abhiraj Krishna (Senior Associate) at Khaitan & Co.

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