100 % FDI in eCommerce Marketplace – DIPP defines the rules

The Department of Industrial Policy and Promotion (DIPP) has released Press Note No. 3 (2016 series) dated 29th March, 2016 on Foreign Direct Investment (FDI) in eCommerce Companies.

The Press Note lays down the following key points:

  1.  Ecommerce defined: Ecommerce to include buying and selling of goods and services over any digital network; It includes TV channels (TV shopping etc.), Mobile sites, internet sites and all other electronic media etc..
  2.  Inventory based model of e-commerce defined:  i.e. where inventory is owned by the ecommerce entity and is sold directly to the consumers (B2C)
  3. Market place based model of e-commerce defined: i.e. providing of an IT platform and acting as a facilitator between the seller and the buyer
  4. It has been clarified that 100 % FDI is permitted in market place model of ecommerce and FDI is not allowed in inventory based model of e commerce.
  5. Market place ecommerce entities can enter into B2B transactions with the sellers registered on the platform.
  6. The Marketplace ecommerce entity will  not be allowed to undertake more than 25 % sales through one vendor / their group company
  7. The Marketplace shall clearly identify the Seller name, address, TIN etc. on its website, invoices etc.
  8. After sales service will be the responsibility of the seller
  9. Marketplace entities will not be able to influence the sale price

Analysis and Implication

Earlier also, 100 % FDI was allowed in Business to Business (B2B) models and India’s biggest marketplaces viz Flipkart, Amazon ,Snapdeal, PayTM and many others entered India structuring themselves as B2B marketplaces (though the term was never defined earlier) and hence attracting billions of dollars of FDI from Private Equity Investors.

However, the B2C component of the transaction was largely managed by their “best friend vendor companies”  viz. WS Retail in case of Flipkart and Cloudtail in case of Amazon. This Press Note’s restriction of not more than 25 % sales through one vendor or group company will pose a challenge to these marketplaces to that extent.

Moreover, the Press note says that the Marketplace ecommerce will not be able to influence the sale price. This will probably stop the predatory pricing followed by these FDI funded marketplaces who were literally distributing investor’s money to the consumers by offering deep discounts (sometimes below the cost price / buying price), to add the number of users and increase the Gross Merchandise Value (GMV) / sales.

Amazon worldwide is known for its inventory based models and it would have loved to have the same allowed in India as  it would have enabled it to keep a control on the quality and timelines of deliveries and also would have allowed it to enter into bulk deals with suppliers and hence get deep discounts / great deals.

However, with this Press Note, it looks remote that the B2C ecommerce will clearly open up to FDI, atleast in the near future.

Press Note 3/ 2016 can be accessed here.

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About Sumit Pahwa

Sumit Pahwa | Partner

A Corporate Lawyer & Company Secretary, Sumit has over 17 years of experience in dealing with the Corporate Legal and Compliance issues of small, medium and large corporates and is the founder partner of the law firm “eMinds Legal”, a Corporate Law Firm based in Gurgaon specialising in Corporate Secretarial, Corporate Legal and Compliances.

Sumit is an expert in Corporate Laws, Governance, Risk & Compliance and has independently led investigations related to Sexual Harassment, Fraud, Cybercrime and whistle blower cases.

Sumit is also the Lead Author of “Corporate Law Referencer” - a leading book on Companies Act, 2013 and LLP Regulations and published by Lexis Nexis.

Sumit is a regular speaker at the Institute of Company Secretaries of India, various management colleges and several small and large corporates on Corporate Laws, Sexual Harassment Laws and Compliances.

Sumit leads the Corporate Legal vertical at eMinds Legal and is supported by a strong team of Corporate Lawyers at eMinds Legal who advise corporates for their routine corporate legal requirements.

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