On December 26, 2018, the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India ("DIPP") by its press note 2(2018 Series) ("PN 2(2018)") revised the norms applicable for foreign direct investment ("FDI") in e-commerce sector. PN 2(2018) comes into force from February 1, 2019. The recent changes come in the wake of continued protests and objections from the brick and mortar retailers and retailer associations alleging predatory pricing, malpractices and heavy discounts by e-commerce entities with foreign investments.

Earlier in 2016, the DIPP had released the norms applicable for FDI in e-commerce applicable so far by its press note 3(2016), which formed part of the consolidated foreign direct investment policy dated August 28, 2017 ("FDI Policy"). The FDI Policy permits 100% FDI in marketplace model under the automatic route, and not in inventory based model of e-commerce.

Please see below the key changes brought out in the FDI Policy now pursuant to PN2(2018) for the e-commerce sector:

No control over inventory by the e-commerce entities:

  • E-commerce marketplace entity will not exercise ownership or control over the inventory i.e. the goods to be sold. If it does, its business would qualify as an inventory based model. The earlier norms only restricted ownership over inventory by the e-commerce entities.
  • What will qualify as control over inventory has been specified. Inventory of a vendor will be deemed to be controlled by the e-commerce entity if more than 25% of purchases of such vendor are from the e-commerce entity or its group companies.

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DIPP has now also included control over inventory (as opposed to only ownership captured earlier) by the marketplace entity to determine if the business is an inventory based or a marketplace model. Threshold of 25% or more of purchases from one vendor is provided to avoid any ambiguity and misuse of the policy. Though it is not specified if this threshold applies on a financial year or calendar year basis. The policy change will lead to broad basing of vendors, and many marketplaces dealing exclusively or with fewer vendors may need to align their structures as well as vendor arrangements with the revised norms.

Certain vendors barred from listing on the e-commerce marketplace:

  • If a marketplace entity or its group companies have any amount of equity participation or control on inventory of an entity, then such entity will not be permitted to sell its products on the platform run by the e-commerce entity.

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In a significant shift, any vendors/ entities (having equity participation or control over inventory by the marketplace or its group companies) will now be barred from posting on the platform. Going by this, joint ventures/ group companies of e-commerce entities can no longer be hosted on the portal. Again, this change will need the e-commerce players to re-assess their structures for compliance with the new norms.

Services to the vendors to be on fair and non-discriminatory terms:

  • The earlier norms provided that the e-commerce entities will not influence the price of goods or services, and maintain level playing field. It has now been clarified that the services provided not only by the e-commerce entities but also other entities in which it has direct or indirect equity participation or common control, to vendors on the platform will be at arm's length and in a fair and non-discriminatory manner.

    Such services will include fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing etc. Cash backs provided by group companies to vendors will be fair and non-discriminatory. It has been clarified that provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.

Services to the vendors to be on fair and non-discriminatory terms:

DIPP has brought in group companies of marketplace entities as well within the ambit of revised norms on fair pricing. Innovative structures were being floated, which defeated the implementation of the earlier norms in the spirit of the law. The move is to curb predatory pricing, deep discounts and cash backs, promotional sales and malpractices alleged by the offline retailers. This will set level playing field for the offline players, and incentivise them to use the platforms. On the other hand, consumers may take a hit as deep discounts and promotional offers are likely to be curtailed. The e-commerce players will definitely find their hands tight and this will impact business efficiencies and synergies for them. The vendor arrangements will need to be re-evaluated for compliance with the new norms on pricing.

No exclusivity mandate to sellers

The e-commerce marketplace cannot mandate any seller to sell any product exclusively to its platform only.

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Exclusive vendor arrangements/ tie-ups will no longer be permitted between the e-commerce platforms and its vendors. All existing contracts will need to be reviewed and modified before the deadline of February 1, 2019.

Annual Reporting to the Reserve Bank of India (RBI) by September 30 every year

All e-commerce entities will be required to furnish a certificate along with a report of statutory auditor to the RBI, confirming compliance with the norms, by September 30 of every year for the preceding financial year.

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Annual reporting with the RBI is a welcome move. One would need to wait and watch for the measures taken by the RBI or DIPP in case of non-compliances with the norms. Though, a separate regulator for the e-commerce sector is now a pressing necessity and awaited in the much anticipated e-commerce policy under formulation by the Government.

Overall, the new norms have received a big cheer from the offline retailers as well as smaller e-commerce players, who faced a stiff competition from the big players giving deep discounts and lucrative offers. The key players in this segment are more likely to be impacted, and will need to re-evaluate and align their structures to comply with the new norms. The consumers may not be very pleased given that the exclusive deals, deep discounts and offers may not remain as lucrative going forward.

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