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Foreign Direct Investment In E-Commerce Sector

April 21, 2017[2017] 80 taxmann.com 214 (Article)
251 Views

Payal Lamba

Corporate Lawyer

Background of the FDI Regime

1. The Department of Industrial Policy and Promotion ("DIPP"), constituted under the Ministry of Commerce & Industry, Government of India is the custodian to make policy announcement pertaining to Foreign Direct Investment ("FDI") through Press Notes, Press Releases, Clarifications, etc., from time-to-time.

The Reserve Bank of India ("RBI") further notifies the policy changes in FDI over a period of time in form of an amendment to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 ("FEMA 20") under the Foreign Exchange Management Act, 1999. Hence, the gazette notification by the RBI thereby making amendment to the FEMA 20 prevails over the Press Notes, Press Release, etc., in case of any conflict.

The above notifications, Press Notes, etc., get subsumed in one Consolidated FDI Policy Circular notified once a year. The last Consolidated FDI Policy Circular was notified on June 7, 2016 which superseded are all other FDI related Notifications, Press Notes, etc., issued in last one year.

Latest Notification on FDI in E-Commerce

2. To make any changes in the sectoral caps apart from notification in Press Notes, Consolidated FDI Policy Circular, FEMA 20, is also required to be amended along with Schedule 1, Annexure-B which specifies the sectoral caps and various conditions therein pertaining to the FDI regime in India. The FDI sectoral caps in Schedule 1 of the FEMA 20 are reproduced in the Consolidated FDI Policy Circular which is issued every year.

Recently, Schedule 1, Annexure B of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 was amended vide notification no. FEMA 387/2017-RB/GSR 224(E), dated March 9, 2017 thereby notifying the particulars of FDI in e-commerce in the official gazette. The said notification reiterates the contents of the FDI in e-commerce activities stated in the last Consolidated FDI Policy Circular of 2016. However, it is pertinent to note a significant change reflected in Entry 16.2.3 (e)- Other Conditions which state that "an e-commerce entity will not permit more than 25% of the sales value on financial year basis affected through its marketplace from one vendor or their group companies."

Present Notification and its Impact

3. The recent 2017 notification amended a previous entry in the guidelines earlier notified in Consolidated FDI Policy of 2016 ("FDI Circular 2016"). The amended entry reads as follows: —

"An e-commerce entity will not permit more than 25% of the sales value on financial year basis affected through its marketplace from one vendor or their group companies."

The words "value on financial year basis" have been newly inserted in the 2017 notification which was missing in the previous FDI Policy Circular 2016.

After the 2017 gazette notification amending the entry pertaining to 25% limit on sales by a single vendor lot of questions have been answered. The amended entry clearly puts 25% limit on value of the sales in a financial year from one vendor or group companies.

Hence, e-commerce giants such as Amazon and Flipkart would be required to undergo a significant restructuring process and add more sellers on their platform so as to comply with the provisions of the foreign exchange laws and maintain a level playing field.

The impact of this amendment would be that it will hamper the monopoly of the leading sellers of the e- retailers. These sellers are mostly funded by the e-commerce entity itself or is part of their group of companies. Therefore, in a financial year no single vendor or group companies of the e-retailers collectively would be able to contribute more than 25% of e-retailer's revenues.

Position before this Amendment

4. Prior to this amendment, though FDI in marketplace model of e-commerce sector was permitted upto 100%, one condition that bothered the large e-retailers such as Flipkart and Amazon was that, only 25% of the sales was permitted by a single vendor or group companies.

In the case of Flipkart, WS Retail Private Limited is one of the top sellers on the e-retailer's platform and undoubtedly, contributed more than 25% sales in a year. Same is the case of Cloudtail India Private Limited, which is one of the largest sellers on Amazon India. Cloudtail is owned by Prione Business Services Private Limited, which is a Joint Venture between Amazon Asia and Infosys co-founder Mr. Narayan Murthy's Catamaran Management Services Private Limited.

Ever since the particulars of FDI in e-commerce activities were notified in Press Note 3 of 2016 and FDI Circular 2016, the biggest concern of these e-commerce marketplace platforms was the criteria on the basis of which sales by a single vendor would be calculated. The guidelines in the FDI Circular 2016 were silent on the period of sales which will be taken into consideration-whether the 25% limit on sales on a single vendor would be on quarterly basis or yearly or whether the sales by a vendor would be measured in terms of sales value or would be based on volume of the products sold.

The FDI Circular 2016

5. It laid down the following key conditions in FDI in e-commerce activities: —

  FDI is 100% permitted in marketplace model of e-commerce.
  FDI in inventory based e-commerce is prohibited1.

Following are the Other Guidelines to be followed for FDI in Market place model of e-commerce sector, while most of the conditions remain the same except clause (e) as shown below: -

(a)   Digital and electronic network will include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles, etc.
(b)   Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis.
(c)   E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services.
(d)   E-commerce entity providing a marketplace will not exercise ownership over the inventory, i.e., goods purported to be sold. Such an ownership over the inventory will render the business into inventory based model.
(e)   An e-commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies.
(f)   Goods/services made available for sale electronically on website should clearly provide name, address and other contact details of the seller. Post sales delivery of goods to the customers and customer satisfaction will be responsibility of the seller.
(g)   Payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.
(h)   Any warrantee/ guarantee of goods and services sold will be responsibility of the seller.
(i)   E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.
(j)   Guidelines on cash and carry wholesale trading to apply on B2B e-commerce.

6. Concluding Remarks

In last one year offering huge discounts and preference to certain sellers by the e-retailers have been controlled by the government. However, there's always a carve out.

To abide by the foreign exchange regulations, e-retailers have devised some interesting marketing strategies, such as offering more discounts on purchases from their preferred sellers for a limited period and display of certain disclaimers. The DIPP Press Notes, Circulars and other Notifications clearly mandated the e-retailers to maintain a level playing field, thereby directing them to avoid offering huge discounts, to abide by the law the e-retailers have come with a disclaimer which claims that the discounts are being extended by the sellers and not the e-retailers. Further, offering better deals or discounts on products purchased through its preferred seller for a limited period would keep them off the 25% sales restriction thereby maintaining equality among the sales of each seller.

Recently, on March 29, 2017 the DIPP replied to All India Online Vendors Association's ("AIOVA") concerns over violation of FDI Circular by e-retailers and forwarded AIOVA's grievances to the RBI as the issue of violation of provisions of the FDI would fall under RBI'S jurisdiction as DIPP only formulates FDI Policy, as it is the market regulator that notifies the same in the FEMA 20. It further added that the Directorate of Enforcement under the Ministry of Finance is the authority for the enforcement of provisions under the FEMA 20. AIOVA is the online vendors' association of which e-retailers such as Snapdeal and Askme Bazaar are part's. This association claims that the large e-commerce players offer aggressive discount strategies which affect the price of the goods and services in the market. Similarly, in May 2016 the Confederation of All India Traders (CAIT) had filed a complaint with the DIPP against e-commerce players for violation of the FDI Circular for offering huge discounts.

In the coming financial year, it would be interesting to witness how these e-commerce giants structure the sales from their associated companies and sellers so that they do not hit the 25% restriction, thus maintaining the level playing field.

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1. Inventory based model of e-commerce means- an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly. Marketplace based model of e-commerce- means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

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