Long and short of e-commerce foreign investment rules

By Kanchan Sinha and Sanya Parmar, L&L Partners

E-commerce in India has grown at a phenomenal pace, successfully changing the way people transact. The Digital India initiative by the government has helped expand the e-commerce sector in India across services ranging from ordering food, online streaming, buying groceries and making hotel reservations. The legislative regime on e-commerce has also grown at an equally phenomenal pace in the last two decades.

Kanchan Sinha
L&L Partners

The government permitted 100% foreign direct investment (FDI) in India in the e-commerce sector through automatic route, for the first time in 2000 for purely business-to-business (B2B) e-commerce activities with certain conditions. The norms pertaining to FDI in the e-commerce sector have undergone many changes over the years with the government defining e-commerce activities to mean the activity of buying and selling through an e-commerce platform. In 2015, the government permitted single-brand retail trading entities (operating through brick-and-mortar stores) to undertake e-commerce activities.

In 2016, the FDI policy redefined e-commerce as buying and selling of goods and services, including digital products, over digital and electronic networks. This definition is so broad that it arguably applies to all web services, including food delivery, video and music streaming, ride sharing and other over-the-top services, in addition to conventional retail marketplaces for utilities, fashion and lifestyle. The policy distinguished between inventory-based (where inventory is owned by the e-commerce entity and is sold directly to consumers) and marketplace-based models of e-commerce (where the e-commerce entity acts as a facilitator or a marketplace for sale between seller and end-consumer and does not own the products or services sold). While the policy permitted FDI up to 100% under the automatic route in the marketplace model, FDI in an inventory-based model was prohibited.

Sanya Parmar
Senior Associate
L&L Partners

In December 2018, the government announced certain restrictive changes to the FDI policy for e-commerce (new norms). In accordance with the new norms effective from 1 February 2019, marketplace entities are not permitted to exercise ownership or control over inventory of a vendor and such inventory will be deemed to be controlled by the marketplace entity if more than 25% of vendor’s purchases are from the marketplace entity or its group companies.

Further, an entity having equity participation by a marketplace entity or its group companies or having control on its inventory by the marketplace entity or its group companies is not permitted to sell its products on the platform run by such marketplace entities. In the absence of any threshold for equity participation, this restriction seems to suggest that even if an entity has equity participation by way of one share by the marketplace entity or its group companies, such an entity may not be able to sell its products on the platform run by such marketplace entity.

The new norms also state that a marketplace entity cannot mandate any seller to sell any product exclusively on its platform. The new norms do not specifically prohibit a vendor from voluntarily choosing to sell its products exclusively on the online platform of the marketplace entity.

Further, the new norms provide that the marketplace entity may provide services (warehousing, logistics etc.) to vendors on an arm’s length basis and in a fair and non-discriminatory manner and that the services would be considered unfair and discriminatory if these are provided to a vendor on such terms that are not made available to other vendors in similar circumstances. In the absence of any definition or guidance on the meaning of similar circumstances, the enforcement of this restriction may be a challenge.

The new norms also state that cashback provided by group companies of a marketplace entity to buyers shall be fair and non-discriminatory. Interestingly, this restriction refers to cashback provided by the group companies of the marketplace entity but does not make any reference to the cashback provided by the marketplace entity itself.

The fact that the existing government places enormous importance on e-commerce is quite evident from the much talked-about Digital India campaign and the fact that an all-encompassing draft e-commerce policy (awaiting finalization) has been issued.

Considering the tremendous importance being given to this sector, it might be important to address the aforesaid issues in the FDI regime in e-commerce for the economy to effectively reap the benefits of this sector.

Kanchan Sinha is a partner and Sanya Parmar is a senior associate at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.


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