FDI in e-commerce– Press Note 2 of 2018

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FDI in e-commerce – Press Note 2 of 2018
16 February 2019

Introduction

The Department of Industrial Policy and Promotion (DIPP) issued Press Note 2 dated 26 December 2018 (Press Note) amending the Consolidated FDI Policy Circular, 2017 (FDI Policy) in relation to the e-commerce sector. The Press Note came into effect from 1 February 2019.

In this update, we have discussed the changes introduced pursuant to the Press Note and its impact on the entities operating in the e-commerce sector.

Background

Under the FDI Policy, the FDI cap for e-commerce activities has been prescribed to 100%, under the automatic route. However, the FDI policy stipulates that such e-commerce activity will be limited to business-to-business (B2B) e-commerce and shall not be in business-to-consumer (B2C) e-commerce. e-commerce entities have, in the past, relied on creative structures in order to carry out B2C e-commerce while remaining within the confines of the law. The Press Note seeks to address this issue.

Key changes to the FDI Policy

The key changes made to the FDI Policy pursuant to the Press Note are as follows:

  • Ownership or control over inventory: an e-commerce entity providing a marketplace (e-commerce entity) cannot have any ownership or control over the inventory, that is, the goods proposed to be sold. The ownership and control of inventory by the e- commerce entity will render the business into an inventory-based model. Under the FDI Policy, FDI is only permitted in a marketplace model and not the inventory-based model. The Press Note further prescribes that the inventory of a vendor shall be deemed to be controlled by an e-commerce entity if more than 25% of the purchases of such a vendor is from the e-commerce entity or its group companies. Vendors having control on their inventory by an e-commerce entity will not be permitted to sell their products on the platform run by such e-commerce entities.
  • Equity participation in vendors: any vendor that has equity participation by an e-commerce entity or its group companies will not be permitted to sell its products on the e-commerce entity. The expression equity participation has not been defined in the Press Note.
  • Prices: e-commerce entities should not directly or indirectly influence the price of goods sold on their marketplace and should maintain a level playing field.
  • Services provided to vendors: services that are provided to vendors by ecommerce entities (such as fulfilment, logistics, warehousing, advertisement/marketing, payments, financing, etc.) should be at arm’s length basis and in a fair and non-discriminatory manner. Cashbacks provided by the group companies of the e-commerce entities should be fair and non-discriminatory.
  • Exclusivity: e-commerce entities should not mandate any vendor to sell any product exclusively on their website.
  • Reporting requirements: e-commerce entities are required to submit a certificate along with a report of their statutory auditors confirming compliance with the FDI conditions by 30 September every year for the preceding financial year.

Clarifications

DIPP issued certain clarifications in respect of the Press Note. These clarifications state that the Press Note has merely reiterated the policy provisions in relation to FDI in the e-commerce sector to ensure better implementation.

Further the Press Note is only applicable to e-commerce entities that operate a marketplace for e-commerce. Meaning that in sectors such as food product retail trading where 100% FDI is permitted, including e-commerce, in respect of the food products produced and/or manufactured in India, the same policy will continue to apply and the Press Note 2 might not affect such an industry.

Amendment to the Foreign Exchange Management (Transfer or Issue of Security to a Person Resident Outside India) Regulations, 2017 (FEMA 20(R))

FEMA 20(R) was amended by the Foreign Exchange Management (Transfer or Issue of Security to a Person Resident Outside India) (Amendment) Regulations, 2019, dated 31 January 2019 (FEMA Amendment). Pursuant to the FEMA Amendment, the provisions of Press Note 2 have been incorporated in FEMA 20(R).

Impact analysis

No exclusive vendors

As a result of the Press Note, e-commerce marketplace entities such will not be able to sell products by vendors exclusively, a practice that has been commonly adopted for the sale of mobiles and other electronics by e-commerce giants. However, as the Press Note 2 is worded to provide that the e-commerce entity cannot “mandate” any vendor to provide products exclusively, it is still open to the vendors to continue providing their products exclusively on an e-commerce entity devoid of any contract in this regard. However, as one prominent phone manufacturer has recently done, companies may continue to sell their products exclusively on e-commerce entities, as their own “strategic choice” and not under contractual arrangements mandating exclusivity.

No equity participation in seller companies

As a major setback to the e-commerce entities, they will no longer be able to sell products from companies in which they (directly or through their group companies) hold equity participation in. The term “equity participation” has not been defined. It is important to set thresholds in respect of equity stakes that constitute equity. Otherwise this may entail a huge setback for e-commerce entities as a majority of them own at least a small amount of equity in a lot of companies that are sellers on their website.

Fewer discounts

Many e-commerce entities enjoy wide public adoration on account of the discounts offered on their websites. However, with the introduction of a bar on these companies from influencing the pricing and mandating seller to sell exclusively on their website, the quantum of discounts being offered may be affected, which in turn could affect consumer behavior.

Impact on the e-commerce entities

Representations were made by major e-commerce entities in respect of extending the deadline for the implementation of the Press Note. The provisions of the Press Note is a cause of concern for these entities and they requested for an extension in order to understand the details of the new framework in a better way so as to implement the required changes in their business models. However, the Press Note was, as planned, brought into effect on 1 February 2019.

Conclusion

The Press Note was introduced to prevent the circumvention of the existing FDI Policy by the big players in the e-commerce sector. It seeks to clarify, limit and define the extent and scope to which FDI is allowed in the e-commerce sector. While the provisions of the Press Note have been welcomed by brick and mortar stores and smaller domestic e- commerce websites, it has become a cause of concern for certain big players who may now have to restructure their existing business models. Further, there are certain expressions in the Press Note that are open to multiple interpretations and need to be clarified.