Here's How FDI will Impact E-commerce Companies

A marketplace cannot directly or indirectly influence the sale price of goods and services

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The Indian multi-brand e-commerce sector has been in focus in the recent times, having witnessed exponential growth, unprecedented investments, aggressive business valuations, lateral acquisitions and stiff competition amongst domestic and global e-commerce stalwarts much to the delight of the end customers, of course. The regulatory position on foreign direct investment (FDI) in this sector, however, got clarified only recently, when the Government of India issued Press Note 3 of 2016 (PN3) on March 29, 2016. Subsequently, the Reserve Bank of India codified PN3 in the form of a regulatory amendment almost a year later on March 9, 2017 (collectively, the Policy Amendments).

The Policy Amendments appear to be directed at reinforcing investor and stakeholder sentiments in the Indian e-commerce sector, and arguably, seek to put the online and offline business-toconsumer (B2C) businesses on a broadly level playing field (barring a few regulatory exceptions). They also offer much-needed regulatory guidance on structuring e-commerce entities in India that have received FDI. Among other things, the Policy Amendments also clarify the scope of a “marketplace” model of e-commerce or jargoned as marketplace and an “inventorybased” model of e-commerce i.e. inventory model. A company set-up as a marketplace only offers a platform (typically, a website or a mobile application) to sellers who list on its platform for selling goods directly to end-consumers in India. Therefore, Indian entities set up as a marketplace only act as a facilitator between a seller and an end-customer and do not own goods that are sold through its platform. This is how popular e-commerce websites Snapdeal, Amazon and Flipkart have structured their business operations in India. Conversely, in an inventory model, the goods are owned by the Indian e-commerce entity that also own the platform, and it directly sells the goods to end-customers across the nation. In other words, in an inventory model, the e-commerce entity is also a seller.

Marketplace Dos and Don’ts

The Policy Amendments do not permit any FDI into an Indian e-commerce company that operates as an inventory model. While, FDI up to 100 per cent is permitted into an Indian e-commerce company that is engaged as a marketplace, this is subject to compliance with the conditions specified in PN3. Some of the key conditions are discussed ahead:

>>A marketplace can only enter into transactions with the sellers registered on its platform.

>>Not more than 25 per cent of the total sales on a marketplace can be from one single vendor or its group companies.

>>A marketplace cannot directly or indirectly influence the sale price of goods and services.

Even before the Policy Amendments were introduced, leading e-commerce businesses with FDI (Ebay, Flipkart, Amazon, Snapdeal, Shopclues, to name a few) were seen to have started restructuring themselves on a theme broadly consistent with the Policy Amendments – presumably due to increasing litigations and regulatory interpretational hurdles under the erstwhile policy framework. Indian start-ups and e-commerce companies proposing FDI into their companies should be aware of the key policy considerations and challenges introduced by the Policy Amendments, as summarized above.

As the Policy Amendments are fairly new, regulatory clarifications on various practical aspects continue to evolve as the implementation of the Policy Amendments progresses.