India: FDI In Inventory Based Model

Last Updated: 19 February 2019
Article by AMLEGALS  

INTRODUCTION

What is E-commerce?

E-commerce can be defined as a platform for buying and selling of goods and services including digital products over digital and electronic network. In India, two models of e-commerce are followed:

  1. Market Model: It is merely an online platform connecting buyers and sellers and has no inventory of its own.
  2. Inventory Model: The marketplace owners owns the products and also manages the complete end-to-end sales process. The inventory of the goods is owned and sold by the e-commerce entity directly to the customers.

What's In News?

After the recent Walmart - Flipkart deal, the Ministry of Commerce and Industry had set-up a task force which has submitted its recommendations in the form of a Draft National Policy Framework 2018 ("the policy") with an intention to bring a revolution in the Indian e-commerce industry.

Prior to Draft National Policy Framework, 100% FDI under automatic route was permitted in marketplace model of e-commerce and FDI was not permitted in inventory based model of e-commerce.

The Commerce ministry had issued a Press note 3 under the Consolidated FDI Policy Circular 2015 in 2016 regulating the FDI norms circumscribing the e-commerce Industry. Major norms are:

  1. 100% FDI under automatic route in B2B e-commerce.
  2. FDI in B2C e-commerce, on the other hand, was not permitted. It was only allowed when:

    1. Manufacturer was permitted to sell its products manufactured in India through ecommerce.
    2. Single brand brick and mortar entity undertakes to sell through e-commerce.
    3. Indian manufacturer is permitted to sell its own single-brand products through ecommerce retail which manufactures 70% of its products in-house and sources at most 30% from Indian local markets.
  3. FDI in inventory based model of e-commerce was strictly prohibited.
  4. E-commerce entities were obligated not to permit more 25% of its sales to be affected by one vendor or its group companies.
  5. They were prohibited to, directly or indirectly, influence the sale price of goods and to maintain a level playing field.

REASON FOR THE POLICY

In May, 2018, Walmart, acquired 77% stake of Flipkart, which is the biggest M&A transaction in the history of India, for $16 billion.

The Walmart-Flipkart Deal had faced much revolt by the traders association and small and domestic retailers as they have alleged that FDI norms have been violated by them. They also alleged that there were the possibility of predatory pricing which will lead to small enterprises running out of business.

Thus as a concern to these rising issues, the draft policy was circulated in October,2018.

ANALYSIS OF KEY PROPOSALS AND THEIR IMPACT

A. Data localization

  1. All the E-Commerce entities such as Amazon, Facebook, and Google who are collecting, storing and processing data from its customers have to be exclusively store in India Only. Making this step a mandatory one, instead of a mere idea or suggestion, a period of 2 years will be given to the industry.
  2. Government shall have access to such stored data for the purpose of national security and public policy subject to privacy rules.

B. Make in India Initiative

FDI in inventory model of B2C e-commerce entities may be allowed in limited manner as long as:

  1. "Made in India" products are sold on the platform.
  2. The founder or promoter is a Resident Indian.
  3. The company is controlled by Indian Management and foreign stake does not exceed 49%.
  4. Government to help e-commerce enterprises raise funds domestically and incentivize investment by large Indian companies in start-ups.
  5. Expanding source funding
  6. Listing of start-ups in lucrative bond-markets and amending tax laws to facilitate Angel Investment in e-commerce start-ups.

C. Pricing Regulations

  1. A single legislation to address all the aspects of e-commerce industry.
  2. Competition Commission of India to amend the thresholds and scrutinize mergers and acquisitions that may "distort competition".
  3. To resolve the "deep discounts" and differential pricing issues, a sunset clause to be mandated upon e-commerce entities.

D. Protection of the Consumer

  1. Establishment of the Central Consumer Protection Authority (CCPA) as the nodal agency for inter-governmental coordination
  2. Mandatory registration of all e-commerce entities and provide platforms for customer redressal.
  3. Amendment is Section 79 of the IT Act to modify the liability of intermediaries.
  4. More grounds to seek disclosure of source code of the entities to monitor unfair trade practices and fraudulent methods.

E. Payment Regulation

  1. The policy recommends mandatory routing of electronic payments on e-commerce websites through Rupay, which is the Indian solution to Master-card and Visa.
  2. A centralized agency for KYC data to be set-up reducing the KYC cost for individual operators and burden on consumers.

F. Promotion of MSMEs

  1. Establishing an e-commerce retail platform exclusively for MSME vendors and suppliers.
  2. Implementation of pilot initiatives for online sale of products from small industry clusters.
  3. Re-examining the TCS provisions in GST imposing the additional burden on SMEs.

CONCLUSION

The Draft National Policy Framework, 2018 is prima facie considered to be "protectionist" in nature as it aims at a larger objective i.e. welfare of the Indian industry as a whole.

The main aim of the policy is to restrict the proxy strategies for wiping out the small Indian players.

The biggest issue which needs to be seen is "how will the small players reach the level of the big giants and dominate the Indian e-commerce market through sale of domestic products and brands?"

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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