India: Choosing The Right Expansion Model; E-Commerce Restrictions On Foreign Brands Operating In India

Last Updated: 13 August 2013
Article by Gordon Drakes, Lisa Sen and Chris Wormald


Businesses are increasingly looking to expand into farther flung overseas markets like India, expecting to achieve rates of growth which are rarely achieved in saturated and depressed Western markets. However, it is important that businesses consider carefully the different types of expansion models available to them and are prepared to take a flexible approach to their international expansion strategy, taking account of local legal restrictions and fast changing consumer habits and expectations. As this briefing note explains, the choice of a corporate expansion model or an arm's length expansion model such as franchising can have a direct impact on a business's ability to engage in e-commerce within the local market.

India is a case in point, where, despite the recent growth in online sales, the Indian Government has reaffirmed its policy on e-commerce in the retail sector, which restricts foreign brands from participating in local e-commerce if they hold shares in the Indian operating company.

The Need for a Consistent Approach to Multi-Channel Retailing

Historically, the majority of brands expanding internationally have been preoccupied with the "bricks and mortar" channel of distribution, based upon an assumption that the target local market is less technologically mature.

This may have been a fair assumption as recently as three to five years ago, and it is still holds true in an increasingly limited number of countries. However, improvements in access to debit/credit cards, digital infrastructure and the growth of technology enablers, such as tablets and smart phones, means that the buying habits and expectations of the burgeoning middle classes in emerging markets such as India are much closer than ever before to the typical consumer in more developed economies. This, coupled with the challenges of setting up physical store expansion programmes and fragmented traditional distribution channels in some markets presents an opportunity whose time has come. Locally developed brands are increasingly techsavy and to survive and prosper in these markets, foreign brands need to ensure that these new customers can access and experience the brand and the related products and services in the same way that consumers do in their home markets. Businesses which use e-commerce as a channel of distribution (and that is now surely the vast majority) therefore need to deploy an expansion model which facilitates this multi-channel approach.

Growth of Retail and E-Commerce in India

India has seen a surge in the presence of Western brands since 2000, when the Indian Government started liberalising its foreign investment regulations and easing foreign exchange restrictions allowing foreign parties to repatriate their income from India.

A recent study entitled "E-tailing in India: Unlocking the Potential" stated that the total size of the business of e-commerce retail sales is set to reach $76 billion by 2021. In 2012, "e-tailing" comprised around 6 per cent of total e-commerce sales, and was estimated to be approximately $0.6 billion. Most of India's $10 billion e-commerce business last year was in other products and services especially travel and financial services. The study added that "The country's growing internethabituated consumer base, which will comprise 180 million broadband users by 2020, along with a burgeoning class of mobile internet users, will drive the e-tailing story".

Current Restrictions on E-Commerce in India

Businesses tend to expand into India either through foreign direct investment (FDI), which involves holding shares in an Indian company, or through an arms length relationship with an independent local franchisee or licensee.

The latest Consolidated Foreign Direct Investment Policy Circular ("the Circular") issued by the Ministry of Commerce and Industry on April 5 2012 has reaffirmed the earlier policy that "retail trading in any form, by means of e-commerce would not be permissible for companies with FDI engaged in the activity of single brand retail trading or multi-brand trading". Currently, foreign investors can hold up to 100% of the shares in an Indian company selling goods of a single brand, subject to a number of conditions. In relation to the multi-brand retail sector, which primarily refers to the supermarkets, a foreign retailer is restricted to holding up to 51% shares in an Indian company.

The FDI model requires the prior consent of the India Government, which can be a lengthy and costly process, and the effect of the Circular means that single-brand or multi-brand retailers who choose to expand into India through a corporately-owned model are not able to sell to their customers via e‑commerce. Single-brand or multi-brand retailers who choose to use the FDI model and still operate an e-commerce business within India run the risk of violating their hard earned FDI approval from the Indian Government. This could result in the approval being rescinded and/or an investigation by the Reserve Bank of India ("RBI") which reinforces the FDI regulations.

This restriction does not prohibit businesses selling the goods into India via an e-commerce site operated outside of India. However, foreign on-line transactional websites are, in practice, not readily accessible to all in India as the Indian Rupee is not fully convertible and cannot be taken out of India. It is possible for a customer in India to purchase goods on-line from foreign websites if they have an international credit card or foreign currency account debit card. There are restrictions on how much foreign currency is available for each Indian customer which depends upon an annual limit prescribed by foreign exchange laws and the limit imposed by the card company. This therefore represents a serious bar to mass market online trading into India.

The Franchising Option

Franchising is an alternative model of expansion which should be considered as part of a business's international and multichannel expansion strategy. Its principal advantages include the ability to expand the brand rapidly and efficiently in new territories by using the capital resources and local market knowledge of experienced operators. In India, the added advantage of franchising is that there are no restrictions on an Indian owned franchisee's ability to engage in e-commerce activities. However, problems may arise, under the current rules, if the foreign franchisor or other foreign investor ever sought to acquire shares or buy out the franchisee's business.

The franchising model could be used to develop "bricks and mortar" sites in key metropolitan areas and, in conjunction with an effective e-commerce operation, the franchisee could then drive business in the "tier 2" and "tier 3" cities, where a bricks and mortar investment is not yet appropriate. Market analysts in India have reported that citizens in tier 2 and tier 3 cities are increasingly using ecommerce websites to purchase goods and services and this type of approach should enable an optimal market penetration.

Watch this Space

For those who wish to penetrate the Indian market, and for whom e-commerce is an important component in the overall commercial strategy, the franchising option currently presents, along with independent wholesale and distribution alternatives, the only available option.

The rules and regulations in relation to FDI or participation in various types of businesses or sectors in India are in a permanent state of flux. The good news is that the various changes in law point to an overall trend of gradual liberation. Many foreign investors have been lobbying for change and the hope is that the Indian Government will strike a fair balance between the interests of all stakeholders, including the Indian interest groups and foreign investors. Retail has been the most sensitive and politically charged of all sectors in India as it affects the small family businesses and middlemen which form a substantial part of that sector. The current Government nearly fell over the efforts to liberalise the multi-brand sector. As a result, liberalisation in relation to ecommerce in the retail sector has also suffered.

It is necessary to watch this space and see how things progress. Much will also depend upon the results of the elections next year as some political parties champion protection of domestic interests while others would like to open India to international players.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Gordon Drakes
In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.