India: The Draft E-Commerce Policy: An FDI Perspective

The e-commerce market in India is expected to reach USD 200 billion by 2026¹ with increased smart phone usage, internet penetration and accessibility to 4G networks. Such a booming industry with exceptional growth has piqued the interests of foreign multinationals such as Amazon and Walmart all of whom want a piece of the Indian e-commerce pie. Such interests have been followed on with substantial investments by foreign entities into various Indian e-commerce players. In 2019 alone, e-commerce and consumer internet companies received more than USD 4.32 billion from venture capital and private equity firms. In October 2020, Amazon India invested over INR 700 crores into its payment unit Amazon Pay². Domestic conglomerates have also entered the e-commerce fray. The most notable recent domestic transaction being the acquisition by the Tata Group of majority stake in Big Basket for USD 1.2 billion.

The rapid activity and growth of the e-commerce industry has also brought with it the attention and scrutiny of government regulators and policy makers as to the functioning of e-commerce marketplaces in India. The Government has understood the potential of the e-commerce industry to contribute to the development of the economy as a whole through job creation, productivity improvement and enhanced customer choices. Keeping this in mind, and the interests of various stakeholders, the Government has formulated an e-commerce policy which is still in draft form ("E-commerce Policy").  This article analyses the provisions of the Ecommerce Policy solely from an investment regulatory perspective.  

The foreign direct investment ("FDI") regulations pertaining to e-commerce is contained in Paragraph 5.2.15.2 of the Consolidated Foreign Direct Investment Policy of the Government of India dated 15 October 2020 ("FDI Policy")

The FDI policy demarcates what constitutes an "Inventory based model of e-commerce" and "Market Place based model of e-commerce". Accordingly, an "Inventory based model of e-commerce" is defined as an activity where inventory of goods and services is owned by the e-commerce entity, and a "Market Place model of e-commerce" is defined as providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.  The FDI policy permits foreign direct investment in the market place model of e-commerce to the extent of 100%  under the automatic route (i.e. without prior government approval). FDI is not permitted in inventory based model of e-commerce.

The FDI Policy allows foreign direct investment into market place e-commerce entities subject to the conditions specified in Paragraph 5.2.15.3 being fulfilled.  Some of the conditions which are relevant for this discussion are the following:  

1. E-commerce entity providing a marketplace will not exercise ownership or control over the inventory i.e. goods purported to be sold. Such an ownership or control over the inventory will render the business into inventory-based model. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.
2. An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.
3. E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field

It is alleged that certain multinational entities are in violation of the aforesaid conditions of the FDI Policy by creating complex multiple entity holding structures.

Keeping the aforesaid situation in mind, the E-commerce Policy provides as under:

• The FDI Policy in e-commerce has been developed in order to ensure that the marketplace provides a level playing field to all participants, while ensuring that distortionary effects, either through means of price control, inventory or vendor control does not happen.
• A situation of capital dumping is to be strongly discouraged.
• The policy aims to clearly demarcate what constitutes a marketplace model and what comprises an inventory-based model of sale and distribution. The policy aims to invite and encourage foreign investment in the 'marketplace' model alone.
• An e-commerce platform, in which foreign investment has been made, therefore, cannot exercise ownership or control over the inventory sold on its platform.
• Online marketplaces should not adopt business models or strategies which are discriminatory, that is, which favour one or few sellers/traders operating on their platforms over others.

CONCLUSION:

It is clear from the E -commerce Policy that the Government proposes to bring in strategies to ensure that the FDI Policy is more strictly regulated.  Once the draft policy is published there will be more clarity on the mechanism to be followed by e-commerce entities and the regulations to which they will have to adhere to. For instance, e-commerce entities will be required to ensure that their processes are not biased and are not partial towards any seller on the platform.

Interestingly, post the notification of the draft e-commerce policy, foreign multinationals have warned the government of the consequences of policy "flip flop" and the scaring away of investment and potential job losses that would consequently follow if some of these changes are implemented.

It is therefore the opportune time for a clear set of policies and regulations to govern e-commerce marketplaces in India and the various stakeholders.

Footnotes

1 India Brand Equity Foundation

2 India Brand Equity Foundation