FDI in e-commerce: The confusion continues
Codhai Raghavan December 20, 2015
Under the extant FDI Policy, 100% FDI under the automatic route is permitted in entities engaged in B2B e-commerce activities, i.e., trading amongst manufacturers, wholesalers, and retailers on e-commerce platforms, but FDI is prohibited in retail trading (B2C activities) through e-commerce. Further, Indian entities having FDI engaged in single brand retail trading (“SBRT”) or multi-brand retail trading (“MBRT”) are specifically prohibited from retailing their products through e-commerce portals.
The Government has, vide a press note dated November 24, 2014, partially relaxed this restriction, and permitted SBRT entities that have a physical presence in India through ‘brick and mortar stores’ to distribute products by way of e-commerce. This allows brands such as Decathlon, Brooks Brothers, and Promod, which already operate stores in India, to also market their products online directly to customers.
Apart from SBRT entities, trading through e-commerce portals has now also been opened to entities which manufacture at least 70% of their products in India and source the remaining 30% from other Indian manufacturers. Such entities having FDI are permitted to sell their ‘branded’ products directly to customers through e-commerce means, provided that the brands are ‘owned and controlled’ by resident Indian citizens. While there was no specific restriction on this under the extant FDI Policy, the existing prohibition on SBRT entities had caused some confusion in this regard. This clarification has therefore been welcomed by Indian brands such as Zovi and American Swan, which have already been distributing their products on e-commerce sites.
Despite these liberalizations, there is still ambiguity regarding permissibility of FDI in entities that own and operate e-commerce marketplaces, like Snapdeal, which allow various sellers to list and market products to customers. In fact, shortly after these FDI relaxations were announced, the Delhi High Court ordered the Government to investigate FDI violations by 21 ‘e-commerce companies’, including Jabong and Limeroad.
Companies that operate e-commerce portals under the ‘marketplace model’ have argued that they merely provide a technology-powered platform to connect retail traders with customers, and do not themselves sell products to directly customers, thereby operating within the confines of the FDI regime. In fact, several companies which have both technology and retailer arms within their group, have raised FDI in the entity that owns and operates the e-commerce platform, while putting complex structures in place to ensure that these FDI-raising entities are distinct from the entities engaged in retail trading through the platform.
On the other hand, Indian retailers’ and traders’ associations have alleged that such entities, while claiming to be technology companies operating marketplaces, are in reality B2C retailers
engaged in MBRT through e-commerce, which is specially prohibited under the extant FDI Policy. Some examples of the B2C behavior exhibited by such entities include the ability of the marketplace operator to offer discounts on products listed by various sellers despite not having any inventory in their own name, the extensive advertising conducted by marketplaces to boost sales on their portals, and the fact that delivery, payments, returns and refunds are processed by the marketplace. It was these associations that filed a petition with the Delhi High Court alleging breach of FDI rules, which caused the court to order a probe into the operations of 21 companies engaged in the online retail sector.
The need for clarity on this issue is quickly escalating. E-commerce is a rapidly growing industry in India which is dependent on funding to fuel the development of supply chain and logistics infrastructure, and there are concerns that the current policy uncertainty is likely to affect investor sentiment and restrict access to funding. E-commerce companies claim that such capital is rarely available from domestic banks and investors, whereas foreign investors have shown greater interest in providing the large ticket funding that is required by the industry.
The industry is therefore keenly awaiting comprehensive clarifications on e-commerce, including with respect to definitions of ‘e-commerce’, tax treatment, and FDI, which the Ministry of Commerce and Industry has promised to provide after consultations with various stakeholders.
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