Foreign Direct Investment in India vis-à-vis E-commerce – Recent developments (Press Note 2 of 2018 Series)

[jyoti jain]

Recently, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India ("DIPP") vide Press Note 2 of 2018 Series has made certain changes in ‘Consolidated FDI Policy’ of  2017 in relation to e-commerce sector. Press Note 2 of 2018 will become effective from 1st February, 2019. The article discusses the issues regarding need of issuance of this press note, allowable limit of Foreign Direct Investment (FDI), control or ownership of inventory, equity ownership, exclusivity clause, services by e-commerce operators, obligations of marketplace e-commerce platforms and sellers, compliance report as contained in Press Note 2 of 2018.

1. Issuance of Press Note 2 of 2018 Series- Why?

In an earlier Press Note 3/2016, it was provided that an e-commerce entity providing marketplace will not, directly or indirectly, influence the sale price of goods or services, which also renders such business as an inventory based model. But, various complaints were received by the Government that certain marketplace platforms were violating the policy by influencing the price of products and indirectly engaging in inventory based model. Therefore, latest Press Note 2 of 2018 Series on FDI policy on e-commerce sector was needed to ensure that the rules are not circumvented.

Press Note 2/2018 is applicable only to marketplace e-commerce entities. FDI in other sectors will continue to be governed by the specific provisions pertaining to them.

2. Allowable limit of Foreign Direct Investment (FDI)

The guidelines under Press No. 2 of 2018 will allow 100% FDI in market place model adopted by e-commerce entities. This benefit will not be available in case of an inventory based model adopted by e-commerce entities.

Comments

• Presently, FDI up to 100% is allowed under the automatic route in case of entities engaged in the marketplace model of e-commerce, subject to compliance with certain conditions. On the other hand, FDI in entities engaged in the inventory-based model of e-commerce is expressly prohibited vide Paragraph 5.2.15.2 of the current Consolidated FDI Policy.
• Marketplace Model v Inventory based Model: A marketplace based model of e-commerce is a model of providing an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. An inventory-based model of e-commerce, on the other hand, is a model where inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly.

1. Control or ownership of inventory by a marketplace e-commerce entity

An e-commerce entity providing a marketplace will not be allowed to exercise ownership or control over the inventory i.e. goods purported to be sold. Such an ownership or control will render the business into inventory based model.

A deeming provision has been provided under Press Note 2 of 2018 by which inventory of a vendor will be deemed to be controlled by a marketplace e-commerce entity if more than 25 percent of purchases of such vendor are from the marketplace e-commerce entity or its group companies.

Comments

• In addition to inventory ownership of an e-commerce entity providing a marketplace (also provided in Consolidated FDI Policy, 2017), control over the inventory by such an e-commerce entity will render the business into inventory model as per Press Note 2 of 2018 and thus, not eligible for 100% FDI under automatic route.
• Currently as per Consolidated FDI Policy, 2017, a marketplace e-commerce entity is not permitted to have more than 25% of the sales value generated through its marketplace platform from one vendor or a vendor's group companies. In a way, large sellers are restricted in order to have level playing field. As a result, various different structures like creation of step down entities, involving other sellers to buy products of large sellers and sell the same on e-commerce platform, etc. have been adopted. To plug in these types of loopholes, Press Note 2 of 2018 Series will now make the vendors responsible to take care of the fact that not more than 25% of its total purchases are from marketplace e-commerce entity or its group companies, otherwise, inventory of vendors will be deemed to be controlled by a marketplace e-commerce entity and thereupon, vendors will not be eligible to sell on that marketplace e-commerce platform by virtue of restriction provided in Press Note 2 of 2018 Series.
• The restriction of not more than 25% purchases of vendors from marketplace e-commerce entity or its group company will prevent the currently followed practice of exclusive tie ups with specific brands for sale on a particular e-commerce platform.
• This requirement will lead to more data collection by an e-commerce platform as it will have to obtain total purchases information of each vendor.

4. Equity Ownership

Press Note 2 of 2018 Series prohibits any entity having equity participation by a marketplace e-commerce entity or its group companies or having control on its inventory by a marketplace ecommerce entity or its group companies, to sell its products on platform run by such marketplace entity.

Comments

• E-commerce players have been trying to develop home-grown brands, as they get an opportunity to place and price such products strategically along with products of vendor. Given that that now an entity having an equity participation by a marketplace ecommerce entity or its group companies will not be able to sell products on the platform run by such marketplace entity, it will be a difficult task to structure home-grown brands.

• In addition to above, any entity having control on its inventory by an e-commerce marketplace platform or its group companies will also not be able to sell its product on that e-commerce platform.

5. Exclusivity

According to Press Note 2 of 2018 Series, a marketplace ecommerce entity will not mandate any seller to sell any product exclusively on its platform.

Comment

Preferential treatment for one or more seller by a marketplace ecommerce platform will no longer exist.

6.  Services provided by e-commerce entities

While running e-commerce business under marketplace model, (i) e-commerce entities or (ii) other entity in which such e-commerce entity has direct or indirect equity participation or common control, are allowed to provide services to vendors on the platform at an arm’s length and in a fair and non-discriminatory manner. Such services will include but not limited to fulfilment, logistics, warehousing, advertisement/marketing, payment, financing, etc.

Comment

The intent behind this Press Note 2 of 2018 Series was to make sure that marketplace e-commerce entities do not directly or indirectly influence the sale price of goods or services, and maintain a level playing field. As per the Note, a marketplace e-commerce entity providing services to a vendor on terms which are not made available to other vendors in similar circumstances, will be deemed unfair and discriminatory. However, cashback provided to buyers by group companies of a marketplace e-commerce entity shall be fair and non-discriminatory as per Press Note 2 of 2018.

7. Obligations of sellers and e-commerce platforms

Press Note 2 of 2018 Series casts certain obligations on sellers and e-commerce platforms in order to protect interests of consumers. Accordingly-

• Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered only on its platform on B2B basis.
• In an e-commerce transaction occurring through market place, a marketplace e-commerce platform will be required to ensure that goods/services made available for sale electronically on website clearly provide name, address and other contact details of the seller.
• Post sales, delivery of goods to the consumer and customer satisfaction will be the responsibility of seller.
• In marketplace model, payments for sale may be facilitated by an e-commerce entity in conformity with the guidelines of Reserve Bank of India.
• Any warranty/guarantee of goods/services sold will be the responsibility of seller in marketplace model.

8. Compliance report

The Press Note 2 of 2018 Series has introduced a new requirement for marketplace e-commerce entities to provide a certificate, along with a report of a statutory auditor, to the Reserve Bank of India confirming compliance with the guidelines under the Press Note 2 of 2018 Series, by the 30th of September every year, for the preceding financial year.

9. Conclusion

The government has tightened the norms for e-commerce players by announcing changes through Press Note 2 of 2018 Series. February 1 onwards, e-commerce companies will be barred from selling products of the companies in which they have shareholdings or having control over its inventory. Pursuant to Press Note 2 of 2018, ‘ownership’ or ‘control’ over the inventory of vendors by a marketplace e-commerce entity will be the initial test for differentiating  a marketplace model from that of inventory based model , as compared to the present ‘ownership’ test only. E-commerce entities providing market place will also not be able to enter into agreements with a specific vendor for the exclusive sale of products on its platform.

Going forward, many e-commerce players will have to re-examine their business models, be it in terms of selling private labels or adding more channels, etc. in order to comply with the guidelines. A compliance certificate is also required to be furnished along with statutory auditor’s report to Reserve Bank of India with regard to compliance with guidelines provided in Press Note 2 of 2018 Series.