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FDI in E-Commerce – Changed Dimensions by Press Note 2 of 2018

July 9, 2019     by bsamrishindia.com

Most of the E-commerce businesses have some form of FDI. With the exponential growth of E-commerce in India in last few years, even though at the cost of very high cash burn ratio, it has directly and indirectly affected other players like brick and mortar stores and politically sensitive players like local kiryana stores, agriculture sector and village and cottage industry. This has exposed E-commerce players on numerous complaints being made against them to the Government of India and therefore, it was imminent that some more conditions or restrictions or otherwise stricter compliances to the existing conditions are on their way. Accordingly, Press Note 2 (PN 2) was released by the Ministry of Commerce and Industry on December 26, 2018 for FDI in e-commerce to balance the scale while Government still being vary of the fact about importance of FDI in the sector for the growth in GDP. This has been done for better enforcement of the policy as enunciated by the Press Note 3 of 2016. “The PN 3 of 2016 had made it clear that ecommerce policy could not directly or indirectly influence prices, but there had been multiple complaints against platforms like Flipkart and Amazon violating these norms to offer discounts through their group entities in logistics and wholesale.”

Sector, Sectoral Cap and Entry Route

Sector/Activity % of Equity/FDI Cap Entry Route
E-commerce activities 100% Automatic

 

As we are aware that FDI is not permitted in inventory based model of E-commerce which is B2C (like Retail trade) and is only permitted in marketplace based model which is B2B (like Wholesale trade).

The conditions introduced by PN 2, which strengthened many existing conditions also, are as under:

Applicability

The changes introduced by PN 2 are effective from February 1, 2019.

Key Definitions

E-commerce- E-commerce means buying and selling of goods and services including digital products over digital & electronic network.

Further, Digital & 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.

E-commerce entity – E-commerce entity means a company incorporated in India, or a Foreign company as defined under Companies Act, 2013 or office, branch or agency as defined in FEMA, owned or controlled by a person resident outside India and conducting e-commerce business.

Conditions for marketplace model

  • 100% FDI under automatic route is permitted in marketplace based (B2B) model of e-commerce.

  • FDI is not permitted in inventory based (B2C) model of e-commerce.

  • E-commerce entity providing a marketplace will not exercise ownership or control over the inventory of the seller and transactions with sellers on B2B basis.

  • Inventory of a seller will be deemed to be controlled by e-commerce entity if more than 25% of purchases of such vendor are from e-commerce entity or its group company.

  • E-commerce entitywill not mandate any seller to sell any product on its platform exclusivity.

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

  • An entity having equity participation by e-commerce entity or its group company will not be permitted to sell its products on the platform run by such e-commerce entity.

  • 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.

  • Warrantee/ guarantee of goods and services sold will be responsibility of the seller.

  • E-commerce entity may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services.

  • E-commerce entity will not mandate any seller for exclusivity.

  • E-commerce entities will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.

  • Guidelines on cash and carry wholesale trading will apply on B2B e-commerce.

Compliances

  • In marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.

  • E-commerce marketplace entity will be required to furnish a certificate along with a report of statutory auditor to Reserve Bank of India confirming compliance of Guidelines by 30th September of every year for the preceding financial year.

Our Critical Analysis

By PN 2, efforts are made to plug gaps basis complaints and demands from retail trade bodies, kiryana store associations considering compulsions of Ministry to appease all and protect vulnerable sections, which essentially would mean that:

  • Unlike the inventory model, which Walmart and Amazon use in the United States, where the goods and services are owned by an e-commerce firm that sells directly to retail customers, India does not allow FDI in inventory-driven models of e-commerce. The restriction is aimed largely at protecting India’s vast unorganized retail sector that does not have the clout to purchase at scale and offer big discounts.

  • E-commerce entity will not be able to own and sell owned inventory on its platform and therefore, private labels/in-house brands owned by e-commerce entity cannot be sold.

  • Introduced concept of deemed control is very restrictive and the seller will therefore be required to sell its products on other e-commerce sites or retail and wholesale trade even if margins are not so good for doing such business.

  • How the statutory auditor of e-commerce entity will be in a position to issue certificate on compliance with Guidelines w.r.t. purchases from vendors or they will rely on certification or declaration from vendor or statutory auditor of vendor in order to certify that no more than 25% of purchases by e-commerce entity or its group company are from such vendor especially verifying where there are lakhs of sellers on large sized market places like Amazon, Flipkart, Snapdeal etc. Follow-ups with Vendors can become tricky and e-commerce market places can introduce declarations cum undertakings.

  • A major attraction for customers of e-commerce entities was lean period launches of exclusive products which cannot happen now so a no-more exclusive launches of One Plus phones on Amazon and Motorola phones on Flipkart. We now have these products on stores like Reliance Digital, Chroma etc.

  • Press note and response by Ministry says that these steps have been undertaken to ensure fair, competitive and transparent business practices in the interest of consumers and to promote level playing fields but whether the provisions for level playing field or fair market play should have been through FDI Policy or Competition Law which is a specific law for the purposes and there ought not be any discrimination whether the investment in e-commerce entity is through FDI or domestic.

  • Various restrictions that Cash backs given by group companies have to be non-discriminatory to Vendors will limit flexibility in marketing when vendor is ready to give extra margins and every time a direct discounting is not the best strategy in marketing.

  • It is not clear if other sectors, such as grocery, food delivery and ride hailing also come under the ambit of the e-commerce policy Industry executives believe grocery delivery startups such as Bigbasket, Grofers and Amazon Retail, need not be rattled as the government has already allowed 100 percent FDI in retail trading of food products manufactured or produced in the country and they are allowed to follow inventory based model provided they maintain separate books of accounts and records (including sales records), separate bank accounts, and separate invoicing for FDI in food retail from those of their other businesses.

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