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Foreign Direct Investment (FDI) in e-commerce

E-commerce generally refers to commercial transactions like buying, selling, leasing, hiring, etc., conducted electronically over the internet. At a very early stage, people were hesitant of transacting online but with the changing trend, advanced security services and movement of entire economy towards a paperless society, e-commerce is widely supported and practiced by a fair size of population.

The policies concerning FDI in e-commerce have evolved quickly in the last few years and the government has been constantly refining the relevant provisions. Some ambiguities still haunt people, either by deliberate design or otherwise, and it is believed that these complexities will be smoothed over in the next few years by the government. FDI rules for e-commerce segment may see considerably easing out but it could be accompanied by an institutionalized regime of oversight to safeguard the interests of domestic brick-and-mortar stores and consumers at large.

From the point of view of the working groups

A mechanism for regulating and administering e-commerce sector will be set up, considering the alleged exploitation of FDI rules via burly discounts by e-tailers including Amazon and Flipkart among others, if Government considers the suggestions by various industry-government working groups on e-commerce. Nuances of some of the rules for protection of various working groups are projected as follows:

  • FDI rules should be eased by enabling e-commerce marketplaces to hold inventory of locally-produced items. However, in this case the founder / promoter of the e-commerce player will have to be the resident of India with its management controlled by Indians and foreign equity not exceeding 49%.
  • Suggestion of a separate wing in the Directorate of Enforcement to be set up to handle grievances related to implementation of FDI rules also came up. Even when the FDI policy debars e-commerce players from giving discounts themselves, brick-and-mortar stores have often accused them of disdaining the rules, citing inadequate oversight of the implementation of the policy. Opposing these allegations, Amazon and Flipkart claim that their actions have always been in conformity with the rules and that the discounts are offered by the sellers of the goods on their platform.
  • The working groups on e-commerce sought to make these restrictions even more explicit by suggesting that restrictions be imposed on e-commerce marketplaces to not directly or indirectly influence the price of sale of goods and services including group companies of the e-commerce marketplace.
  • Prohibiting bulk purchase of branded goods such as electronic goods, white goods and branded fashion products by related-party sellers which lead to price distortions in a market place.

 

E-commerce was categorized as ‘inventory based model of e-commerce’ and ‘marketplace based model of e-commerce’ by Department of Industrial Policy and Promotion (DIPP) in 2016 via a press release. Prior to this, erstwhile FDI Policies merely stated that e-commerce entities can only undertake B2B e-commerce and not B2C e-commerce. More than a decade after eBay started its operations in India, press note 3 categorically clarified that 100% FDI under automatic route is permitted in ‘marketplace based model of e-commerce’ and that FDI is not permitted in ‘inventory based model of e-commerce’ (barring food retail). Note also made certain significant conditions applicable to e-commerce marketplace entities, such as their obligation not to influence the sale price of goods and services in any manner and prohibiting such entities from providing warranties / guarantees.

FDI often prove to be powerful medium stimulating competition in e-commerce sector. Also, organized e-commerce operations are a budding phenomenon in India and lead to exponential growth of markets, despite all the plunges. Require assistance or more information for investment routes to India, please check India: The nucleus for FDIs and FDI in retail sector

At AJSH, we also offer a variety of other services including assistance in regulatory compliances for setting up business in India via FDI route, company registration, accounting and bookkeeping, statutory audits, tax compliances, trademark registration and setting up of a SEZ, for any assistance, please contact Us