India: New Press Note – An Impetus Or Roadblock For E-Commerce

Last Updated: 16 May 2016
Article by Ritesh Singh


With the growth of marketplace e-commerce companies in India, numerous issues have arisen in recent months surrounding their existence and the investment of private equity in these companies. In order to clear uncertainties on FDI in e-commerce, the Department of Industrial Policy & Promotion ("DIPP") issued guidelines for foreign investment in e-commerce by way of Press Note 3 of 2016, dated March 29, 2016 ("PN3"). Apart from prescribing certain key definitions, which were missing so far, including e-commerce, marketplace based model of e-commerce and inventory based model of e-commerce, the PN3 lays down respective caps for FDI as well. According to PN3, foreign investment is allowed up to 100% under the automatic route (where no prior investment permission is required) in the marketplace model while no foreign participation is permitted in the companies working on the inventory based model.

This bulletin seeks to give an analysis of PN3 highlighting the lack of clarity in it and its practical ramifications on e-commerce business.

1. Elements of PN3

Until the issue of PN3, the consolidated FDI Policy of 20151, dated May 12, 2015 (the "FDI Policy") allowed foreign investment in B2B companies while it was prohibited in B2C. With the introduction of PN3 and specifically in terms of paragraph 1 of PN3, foreign companies are now permitted to invest in B2C companies as well in (a) a manufacturer manufacturing its products in India, (b) a single brand retail trading entity selling its products under a single brand through its brick-and-mortar stores, and (c) an Indian manufacturer who owns the Indian brand and manufactures 70% of its products in-house and sources, at most, 30% from Indian manufacturers.

1.1 Important definitions in PN3

The term E-commerce has been defined in an extremely broad way to bring within its ambit purchase of digital products, goods and services through digital and electronic networks. The phrase digital and electronic network2 means buying and selling of products through televisions and mobiles as well. PN3 defines the term E-commerce entity to cover those entities conducting e-commerce business i.e., companies formed under Companies Act, 1956 and Companies Act, 2013 ( the "CA 2013"); a foreign company in terms of Section 2 (42) of the CA, 2013, which means and includes company or body corporate incorporated outside India which has a place of business in India whether by itself or through an agent, physically or an electronic mode ; or any office, branch or agency which is under ownership or control of person resident outside India.

The term inventory based model of e-commerce is that model of e-commerce where products are owned by e-commerce entity and is sold by it directly to the consumers over the digital and electronic network and the term marketplace based model of e-commerce is where an e-commerce entity acts as mere facilitator between the seller and consumer as it provides the technology platform for seller to sell the products directly to consumers. Thus, the main distinguishing feature between the two models is that an e-commerce entity which owns the products falls in the domain of inventory model and which does not own the products falls within the domain of marketplace model.

1.2 Other key features of PN3

PN3 allows the marketplace e-commerce entity: (i) to transact with their registered B2B sellers on B2B basis; and (ii) to enter into support services agreements with sellers registered on its platform for providing support services, such as warehousing, logistics, order fulfillment, call centre, payment collection. It is specifically provided in paragraph 2.3 (iv) of the PN3 that ownership of the product by marketplace e-commerce entity is completely prohibited as ownership will lead to its conversion into inventory based model of e-commerce entity.

PN3 also provides that (i) no vendor or their group companies can alone account for more than 25% of sales through marketplace e-commerce entities; (ii) no marketplace entities shall directly or indirectly influence the sale price of goods or services; and (iii) such entities shall maintain the level playing field. In addition to the above, PN3 restricts marketplace e-commerce entities from issuing warranty/guarantee for goods and services sold by seller; and taking the responsibility of orders fulfillment after the sale of goods.

2 Analysis

2.1 Distinctions: In our view, the distinction made between manufacturer and Indian manufacturer in PN3 is not needed as foreign investment can only be in an Indian manufacturer. Paragraph 1 (iii) of PN3 permits FDI in only that Indian manufacturer, which owns the Indian brand and manufactures 70% of its products in house. Hence, there must be some reason why the distinction is drawn, but the rationale is unclear and, therefore, to that end, DIPP should issue a clarification on the purpose of the distinction.

2.2 Indian Brand: Further, a foreign company with a wholly-owned subsidiary ("WoS") or JV company in India cannot be allowed to sell its products through its own e-commerce platform unless it has an Indian brand, which is owned by its WoS or JV company. The matter gets complicated as Indian brand is also not defined in PN3 or FDI Policy and, perhaps, it could potentially mean a brand, which is a registered trademark in India.

2.3 Other expressions: The word at most in paragraph 1 (iii) of PN3 can be interpreted to mean that an Indian manufacturer is at liberty to source remaining 30% of its products from foreign company. DIPP will need to explain whether it intended to allow an Indian company to import 30% of products. The term digital product used in the definition of E-commerce might be a source for new controversy as the term digital product has not been defined in PN3 or FDI Policy and it can be given an expanded meaning to include songs and movies available for download on digital and electronic network. If such expanded meaning is given to the term digital product then no FDI is permitted in those websites or mobile applications, owned by Indian companies, which own and sell music, songs, movies, etc. Surely, that could not be the intent of the policy makers. The reference to services, in the e-commerce definition, means that PN3 is also intended to apply to e-commerce entities engaged in providing services. PN3 makes a specific clarification that FDI up to 100% is permitted in e-commerce ventures operating in the services sector. Thus, those companies which are in the business of providing on-line food ordering service, on-line taxi service, on-line service of hiring of professionals or household workers, will be allowed to avail FDI up to 100% under the automatic route.

2.4 Other Conditions: Some conditions (no single company to account for more than 25% of sales and e-commerce entities to not influence, directly or indirectly, the selling price) in PN3 have been introduced with an aim to ensure that e-commerce business in India moves correctly and predatory price approaches are checked. However, this 25% condition will impact the structure of seller base of those entities who purchase products from primary sellers or allow only primary sellers to display their products on e-commerce platform. It is possible that with the introduction of this 25% condition entities may have to restructure their seller base. Then, the condition of preventing influence of the selling price, directly or indirectly, could lead to end of discounts offerings whereas there is no such restriction on entities operating on the inventory model. There is also no intelligible differentia for making inventory based model as a class distinct from marketplace model.

The restriction on delivery of products by marketplace entities after the sale might become a big issue for them as sale is completed when an order is placed. Section 4(4)3 read with Sections 194 and 205 of the Sale of Goods Act envisage that the sale is concluded upon the transfer of property in specific and deliverable goods to the buyer. Thus, a marketplace e-commerce entity can only provide the service of order fulfillment if its sale condition specifically provides that placing of order is only an agreement to sell and sale ensues on delivery of the product to the buyer. Further, PN3 fails to consider that after sales restrictions could create bottleneck for sellers, which are small enterprises, which do not have the necessary infrastructure for meeting delivery requirements.


PN3 has left open many grey areas, which might be a source of new litigation between various stakeholders. Further, given its immediate implementation from March 29, 2016 and lack of time to existing entities to restructure their business and operation model, businesses could suffer because no entity can reasonably be expected to restructure its business rapidly. The necessary clarifications on marketplace model and inventory model in PN3 might act as impetus for investors, who want to invest in marketplace e-commerce entities. Only time will tell as to whether this press note has been an impetus or roadblock for e-commerce business, but it is indeed a step in direction of regulation of e-commerce industry.


1 Paragraph of FDI Policy expressly defined- E-commerce activities as the activity of buying and selling by a company through an electronic platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would apply to e-commerce as well.

2 Digital & electronic network will include network of computers, television channels and any other Internet application used in automated manner such as web pages, extranets, mobile etc.

3 An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

4 This section provides that where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. In this context, it will be necessary to review the contract terms, intention of the parties as well as circumstances of the case.

5 This section stipulates that where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed.

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.

In association with
Related Video
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
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 you may opt out by clicking here

    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.

    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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.

    By clicking Register you state you have read and agree to our Terms and Conditions