India: FDI In E-Commerce

The Consolidated FDI Policy (FDI Policy) states that 100% FDI is allowed under automatic route in e-commerce activities. While, at first blush, the policy pertaining to e-commerce seems straightforward, a detailed analysis of various conditions prescribed in the same FDI Policy make it clear that the position is infinitely more nuanced than it first appears. This article aims to deal with all aspects of FDI in e-commerce viz. FDI in e-commerce entities, as well as manufacturing and trading entities that engage in e-commerce.

E-commerce was, for the first time, categorised as 'inventory based model of e-commerce' and 'marketplace based model of e-commerce' in Press Note No. 3 (2016 Series) issued by DIPP on 29 March 2016 (PN 3). 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 India, PN 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'. PN 3 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.

In the context of manufacturing entities, the FDI Policy states that 'a manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce, without Governmental approval'. Manufacturing entities that sell their products on e-commerce retail can accept FDI up to 100% under the automatic route. However, the FDI Policy does not clearly deal with sale of products that are contract manufactured in India through wholesale and, or, retail, including through e-commerce. Since the FDI Policy does not restrict the term 'manufacture' to only manufacturing by the relevant entity and defines it broadly, and the operative portion of the FDI Policy on e-commerce activities by manufactures merely refers to 'products manufactured in India', it is plausible to interpret the FDI Policy to include entities that get their products contract manufactured in India as a 'manufacturer' for the purposes of the FDI Policy. As contract manufacturing is commercially well recognised, it is necessary that the FDI Policy specifically deals with this issue.

Insofar as trading entities are concerned, the FDI Policy permits entities engaged in cash & carry wholesale trading / wholesale trading, i.e., entities that sell goods to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers, to undertake B2B e-commerce. Accordingly, 100% FDI under automatic route is permitted in such entities, subject to such entities complying with all other relevant conditions prescribed under the FDI Policy.

Entities with FDI which are engaged in multi-brand retail trading (MBRT) are not permitted to undertake retail trading, in any form, by means of e-commerce. The reasons for this is obvious, as the policy on MBRT set out in the FDI Policy is an enabling policy and relevant State Governments / Union Territories are to take their own decisions in regard to implementation of the MBRT policy in the respective territories. MBRT retail sales can only be undertaken in those States / Union Territories which have agreed, or agree in future, to allow FDI in MBRT.

Press Note No. 1 (2018 Series) issued by DIPP on 23 January 2018 (PN 1) has permitted 100% FDI under automatic route in entities engaged in single-brand retail trading (SBRT). PN 1 continues to only permit SBRT entities with FDI which operate through brick and mortar stores to undertake retail trading through e-commerce. This provision was first introduced by PN 12, and prior to this, retail trading by means of e-commerce was not permitted for SBRT entities with FDI. The reasons for permitting only entities which operate through brick and mortar stores to undertake retail trading through e-commerce is not very clear. If an entity having a store in one city can undertake retail trading through e-commerce in other parts of the country without any restriction, then such a requirement has no real rationale.

Entities undertaking retail trading of food products manufactured and, or, produced in India, including through e-commerce, can only receive FDI under government approval route. Also, entities undertaking sale of services through e-commerce can receive FDI under automatic route, subject to compliance with the other conditions of FDI Policy applicable to the relevant service sector.

The policy pertaining to FDI in e-commerce has evolved quickly in the last few years and the government has been constantly refining the relevant provisions. But there are still some ambiguities, either by deliberate design or otherwise, and it is hoped that these ambiguities will be ironed out in the next few years by the government.

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.

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