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FDI Policy in E-Commerce

** Image source: https://blog.ipleaders.in/fdi-policy-india-e-commerce-2/ 

By Vedant Kashyap and Siddharth Kothari, NALSAR University of Law

E-Commerce in India

From Fabmart.com, the very first e-commerce venture, to the latest announcement by RIL, several attempts have been made at capturing the online market sector.[1][2] This sector is better known as E-commerce.[3]

E-commerce is a kind of business model, or section of a bigger model, which facilitates conduct of business over electronic means. It may operate in 4 of the major segments of the market: Business-to-Business, Business-to-Consumer, Consumer-to-Consumer and Consumer-to-Business.[4][5]

There are primarily three kinds of e-commerce business models in play in India.[6]

i. Inventory model

ii. Market-place model

iii. Hybrid model of the previous two

The e-commerce market in India has seen a period of rapid growth. [7]According to a Forbes report, “It is poised to be one of the largest and fastest e-commerce growth markets for the next decade. The e-commerce sector will grow to $202 billion in the next years”.[8] The CEO of NITI Aayog, the Indian government’s premier think tank, has been confident of the sector’s prospects as well. He contends that it has a particularly important part to play in the growth story of India. “E-commerce market has brought a revolution in India’s retail sector and nobody can stop it now,” he said at an event.[9] According to a report by Bain & Company, in the 5-year period from 2013 to 2017, the e-commerce witnessed a compound annual growth rate (CAGR) of 53%.[10]

This growth has been fuelled by a variety of factors including deep discounts, private labels, exclusivity contracts, same-day delivery and other such attractive offers.

FDI Policy in E-Commerce

Foreign direct investment (FDI) is defined as “an investment involving a long‑term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).”[11]

Indian FDI policy on e-commerce was first pronounced through Press Note 2 of 2000.[12]  It allowed 100% FDI in B2B transactions. The policy was amended in 2016 in view of the impressive growth seen in the sector.[13]

Under the new policy, 100% FDI was allowed through automatic route for B2B transactions and e-commerce sites which operated on ‘marketplace model’.[14] The ‘marketplace model’ is a model of e-commerce where the website works as a facilitator of the transaction between the seller and the buyer.[15]

This automatic route was not provided to entities which engaged in B2C business as well as businesses operating on the ‘inventory model’.[16] The ‘inventory model’ is a way of conducting businesses where the e-commerce entity owns the goods and services and provides the same directly to the consumer. B2C has remained barred for FDI from the beginning.[17]

However, the limitations placed by the new policy were not followed by the entities and were flouted blatantly by ingeniously developed arrangements. The FDI policy was reiterated in December 2018 with additional stipulations.

Press Note 2 of 2018

The policy mentioned can be broadly explained under 5 headings:

a.      Marketplace

Previously, only ‘ownership’ of the goods was prohibited. However, in the present policy this restriction has been extended to encompass both ‘ownership’ as well as ‘control’ of goods. Additionally, the term ‘control’ remains undefined, which opens up the FDI policy to a plethora of confusions.

Under PN 3 of 2016, an entity would be placed under the ‘inventory model’ if more than 25% of its transactions are supplied by a particular seller. In the new policy, this has been modified drastically. Now, if 25% of a seller’s business is based on the e-commerce site, it will be qualified as inventory model. This makes compliance much more complicated. For example, if a seller ‘A’ sells more than 25% of its goods on Flipkart, it will be said to be controlled by Flipkart and the e-commerce model will be said to be inventory.

b.      Equity participation

The policy prohibits a seller from selling on the platform if the e-commerce entity or any of its group companies have equity participation. However, there are accompanying ambiguities associated with this provision.

i. Absence of any threshold: No threshold for equity participation has been mentioned in the Press Note. This could raise objections whether a seller could be disallowed even if the main entity owns one share of it.

ii. Whether indirect equity participation is permitted: There is no mention of whether only ‘direct’ ownership is prohibited or even ‘indirect’ form will be barred. However, considering the fact that ‘indirect’ control has been expressly dealt with, it might not be incorrect to assume that only ‘direct’ equity participation is subject to prohibition.

iii. A third issue regarding convertible instruments comes within the scope of this provision. A clarification pertaining to this aspect might be warranted.

c.      Exclusivity

In the previous years, companies have come up with various ‘exclusives’ in order to beat competition such as OnePlus-Amazon partnership. This arrangement has also been prohibited by the government. Again, here the issue of checking compliance can crop up. A seller may informally agree with the E-commerce entity to sell in exclusivity. This can be done without an express contract. A seller might even decide to sell exclusively on a platform out of his free volition without any consultation with the entity. Therefore, certain loopholes are present in the present policy which need to be dealt with by the government if it intends to implement its restrictions properly.

d.      Impartiality

The entities are now required to be impartial and provide a level playing field while offering services such as discounts, same-day delivery etc. This prohibits companies from causing any kind of influence on the prices of goods. It also mandates them to provide same kind of services to sellers who are placed similarly. This weeds out the threat which e-commerce giants, with billion-dollar funding given by foreign companies, pose to local sellers with their frequent deep discount festivals.

e.      Compliance

This provision requires each entity to furnish a certificate as well as an audit report to be submitted to the RBI before 30th September of each year. However, the current regulations of the central bank are not in line with this provision. Due to a supervening effect of the former over the latter, unless amendments are made, the certification may not become compulsory. Furthermore, some certifications required are pertaining to the sellers. This may become a menace for the entities as they will be left to audit hundreds of sellers.

Conclusion

Most amendments in the new FDI policy are clarificatory in their nature and are not imposing any new restrictions. However, due to the shortcomings of the drafting and the elusiveness in the definitions, certain terms pose a conundrum on the e-commerce websites. One reason for coming up with these rules is to assuage the offline vendors who have been complaining that e-commerce retailers have a huge unfair advantage due to the access to FDI. These amendments are envisaged to level the playing field.

The new policy will impact e-commerce websites in a two-pronged manner. First, most buyers shop online because of the enormous discounts and exclusivity of products available on online platforms. However, the new exclusivity clause would not be able to provide such flexibility to these enterprises and in turn, impact the revenue and growth of these e-commerce companies in India.

Moreover, clause (iv) will also have a bearing on the private labels started by such e-commerce entities since, now they cannot supply more than 25 per cent of their goods to the entity. Private labels reap the entities better profits through exclusive offerings made at lesser cost and carrying higher margins. However, now such entities would have to offload their equities in these private labels as well as restrict their sale to less than 25 per cent of their total sales to not find themselves on the other side of law.

The motive of these amendments can be said to be in good faith however there has to be a balance between International players’ interests and those of Indian retailers. The e-commerce entities were also not consulted before making such major changes.

The scale of these alterations in the policy are such that they require substantial changes in e-commerce business models. Amazon Global Store has removed almost all of its product from Amazon. Out of 50 Lakh products only 40,000 are still listed.[18]

International retail giant Walmart has reportedly stated that the new restrictions are not going to be an impediment to their expansion plans.[19]

The policy is significant as it will level the playing field and provide an equal opportunity for homegrown e-commerce entities and other offline stores. However, it should be prudent on part of the government to come up with clarifications on the several grey areas present in the policy. The failure to do so can be misused by the companies by circumventing the rules through various arrangements and could even defeat the purpose of the policy itself.

 

 

[1] Press Trust of India, India’s First e-Commerce Company Fabmart.Com’s Founder K Vaitheeswaran Today Said …, Business Standard India, Jul. 30, 2017, https://www.business-standard.com/article/pti-stories/india-s-first-e-commerce-company-fabmart-com-s-founder-k-vaitheeswaran-today-said-117071100874_1.html.

[2] Rhik Kundu, Reliance unveils e-commerce plan to take on Amazon, Flipkart, https://www.livemint.com (Jul. 30, 2018), https://www.livemint.com/Companies/QYDmQoNoYiCQMhESu3CLaN/Reliance-takes-on-Amazon-Flipkart-in-India-ecommerce-slugf.html.

[3] The Information Technology Act, 2000, No. 21, Acts of Parliament, 2000.

[4] Hossein Bidgoli, Electronic Commerce: Principles and Practice (2002).

[5] Hereinafter B2B, B2C, C2C and C2B.

[6] Warren Raisch, The EMarketplace: Strategies for Success in B2B ECommerce (2002).

[7] K. Das & Affreen Ara, Growth of E-Commerce in India, Growth, available at: http://ijcem. in/wp-content/uploads/2015/08/Growth_of_E_Commerce_ in_India. pdf (accessed 9 March 2019) (2015).

[8] John Koetsier, Report: Amazon India Worth $16B With 30% Market Share, Will Hit $70B GMV In 2027, Forbes, https://www.forbes.com/sites/johnkoetsier/2018/05/18/report-amazon-india-worth-16b-with-30-market-share-will-hit-70b-gmv-in-2027/.

[9] E-commerce to play major role in India growth story: Amitabh Kant, https://www.livemint.com (Mar. 5, 2019), https://www.livemint.com/industry/retail/e-commerce-to-play-major-role-in-india-growth-story-amitabh-kant-1551790505459.html.

[10]  Melanie Sanders, Kanaiya Parekh, Hewie Kang, Marc-André Kamel and Jonathan Cheng, The Future of Retail: Asia’s Ecosystems (December 17, 2018), https://www.bain.com/insights/the-future-of-retailing-asias-retail-ecosystems-report/

[11] This general definition of FDI is based on OECD, Detailed benchmark Definition of Foreign Direct Investment, third edition (OECD, 1996), and International Monetary Fund, Balance of Payments Manual, fifth edition (IMF, 1993).

[12] See Press Release, Ministry of Commerce & Industry, FDI Policy on E-Commerce (04 FEB 2019).

[13] Satyajit Gupta, Press Note 3 of 2016: ‘Old wine in a new bottle’?, IndiaCorpLaw (April 4, 2016), https://indiacorplaw.in/2016/04/press-note-3-of-2016-old-wine-in-new.html.

[14] Id.

[15] Raisch, supra note 6.

[16] Supra note 13.

[17] Akhoury Winnie Shekhar and Pavani Nath, New FDI Restrictions Introduced For E-Commerce Marketplace Entities – Corporate/Commercial Law – India, http://www.mondaq.com/india/x/768258/Corporate+Commercial+Law/New+FDI+Restrictions+Introduced+For+ECommerce.

[18] Amazon’s Global Store spooked by e-commerce FDI policy; product count almost vanished, The Financial Express (Mar. 30, 2019), https://www.financialexpress.com/industry/sme/fdi-ecommerce-regulations-take-down-amazons-global-store-products-from-50-lakh-to-just-40000/1512432/.

[19] Disappointed with India’s new FDI e-commerce policy, but we are moving forward: Walmart, Business Today (March 9, 2019), https://www.businesstoday.in/current/corporate/disappointed-with-india-new-fdi-ecommerce-policy-but-we-are-moving-forward-walmart/story/325245.html.

 

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