The Department of industrial Policy and Promotion, through Press Note no. 2 of 2018, has sent out significant 'clarifications' on regulation relating to Foreign Direct Investment (FDI) in e-commerce sector.
Just to outline, there are two models of e-commerce activities viz:
- Inventory based model-where inventory of goods and services is owned by the e-commerce entity and is sold to the customers directly. FDI is not permitted in such inventory-based model of e-commerce.
- Marketplace based model-where the e-commerce entity provides only information technology platform on a digital and electronic network to act as a facilitator between buyer and seller. 100% FDI is permitted under automatic route under this model, subject to certain conditions.
Such marketplace e-commerce entities would engage only in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce. Such entity would be permitted to enter into transactions with sellers registered on its platform on B2B basis.
These e-commerce entities are allowed to render support services to sellers like warehousing, logistics, order fulfilment, call centre, payment collection and such related services.
It was provided that if the e-commerce entity exercises ownership or control over the inventory sought to be sold, it will be regarded as 'inventory-based model'.
- It is now clarified that if more than 25% of purchases of the seller are from marketplace entity or its group companies, the inventory will be deemed to have been controlled by the e-commerce entity and in such circumstances, the model will be regarded as 'inventory-based model'.
There was provision that an e-commerce entity will not permit more than 25% of the sale value effected through its platform, in a financial year, from one seller or its group companies.
- This restriction has been rightfully removed.
There was no restriction on equity participation by e-commerce entity into the entity selling goods and services.
- It has now been provided that any entity having any equity participation by the e-commerce market place entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.
There was provision that e-commerce marketplace entities will not directly or indirectly influence the sale price of goods and services and shall maintain level playing field.
- It has now been clarified and elaborated that Service provided by e-commerce entity or its group companies to the sellers on its platform should be at arms' length and in a fair and non-discriminatory manner. Provision of services to any seller on such terms which are not made available to another seller in similar circumstances shall be regarded as unfair and non-discriminatory.
- It has been further clarified that e-commerce entity will not mandate any seller to sell any product exclusively on its platform only.
The above changes are applicable with effect from 1st February 2019. These are significant clarifications/changes for the companies who are engaged in providing e-commerce platform and having Foreign equity participation. These companies will have to take a close look at their current business model to ensure that they continue to remain within the parameters of regulations framed under this policy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.