ARTICLE
9 January 2025

E-Commerce Regulations In India: A Guide For Foreign Investors

AP
AK & Partners

Contributor

AK & Partners is a full-service law firm, whose expertise spans diverse practice areas, including Banking and Finance, Dispute Resolution, Transaction Advisory and Funds, Data Privacy, Tax, and regulatory compliance. Our services are offered across different legal forums and jurisdictions, including the USA, the UK, Singapore, Italy, Spain, Sri Lanka, etc.
India's e-commerce sector has become a pivotal contributor to economic growth, driven by a growing consumer base and widespread digital adoption. The sector offers significant opportunities for investors,
India Government, Public Sector

Introduction

India's e-commerce sector has become a pivotal contributor to economic growth, driven by a growing consumer base and widespread digital adoption. The sector offers significant opportunities for investors, especially due to the increasing internet penetration and customer spending power. The industry has seen big foreign investments from giants like Amazon and Walmart. However, it must be noted that before entering into this market, navigating the legal requirements under the Foreign Exchange Management Act, 1999 (FEMA) and related rules is critical for compliance and operational success.

Defining e-commerce entities

Under the Consumer Protection (E-commerce) Rules, 2020 ("E-commerce Rules"), an "e-commerce entity" is defined as any individual or organization that manages a digital or electronic platform for conducting e-commerce activities. This definition excludes sellers who independently list their products or services on marketplace platforms. The broad scope of this definition means that compliance obligations apply to a wide range of business models, often without differentiation between operational structures.

Foreign Direct Investment Framework

The regulatory framework for foreign investment in e-commerce is governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules"), which consolidate the Foreign Direct Investment ("FDI") Policy dated October 15, 2020. NDI Rules distinguish between two primary e-commerce models:

  1. Inventory Model - Where the e-commerce entity owns the inventory and sells directly to consumers. FDI in this model is not permitted.
  2. Marketplace Model - Where the e-commerce entity acts merely as a facilitator between buyers and sellers. 100% FDI is allowed under this model, subject to other conditions.

Other Conditions for FDI in E-commerce

As per the NDI Rules, foreign investment in a marketplace e-commerce entity is further subject to further restrictions, inter alia:

  • An entity receiving investment from the marketplace operator cannot sell its products on the same platform.
  • Marketplace platforms cannot control or own inventory, as doing so transforms them into inventory-based models, which are prohibited for FDI.
  • Services like warehousing, logistics, and payment collection must be offered to vendors non-discriminately.
  • Pricing policies should maintain a "level playing field" without influencing product pricing.
  • Further, foreign-funded e-commerce platforms must obtain an annual compliance report from the statutory auditor by September 30 each year confirming compliance with e-commerce guidelines.

Other Compliance obligations

E-commerce platforms in India face stringent compliance obligations under multiple laws, including consumer protection, intermediary liability, data privacy, payment regulations, and taxation.

Consumer Protection Act 2019 ("CPA 2019") read with E-Commerce Rules impose several regulatory requirements upon e-commerce entities, as follows:

  • appointment of a grievance redressal officer to address consumer complaints promptly and a nodal officer to ensure compliance with the rules;
  • sellers operating on these platforms must provide disclosures such as product descriptions, prices, country of origin, return policies, and warranty details to enable consumers to make informed decisions;
  • e-commerce platforms must set up grievance redressal mechanisms with ticket-tracking systems for complaints and ensure product listings match their actual descriptions.
  • liability safeguards must also be implemented to protect consumers from misleading advertisements, defective goods, and unfair trade;
  • manipulative practices, such as flash sales that create artificial scarcity, are prohibited.

Downstream investments and control restrictions

Foreign investors should also be aware of restrictions concerning downstream investments. If an Indian entity with foreign investment makes further investments in another company, such transactions must comply with entry routes, pricing guidelines, and sectoral caps as applicable in the case of FDI. Control over inventory by foreign-owned entities, even indirectly, could also lead to non-compliance, potentially invalidating their operational model.

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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