On December 26th, 2018 the Department of Industrial Policy and Promotion under the Ministry of Commerce (the “DIPP“),introduced stricter guidelines that govern foreign direct investment (“FDI“) in e-commerce firms. The Government through press note 2 (2018) (“Press Note“), provided for guidelines applicable to such e-commerce entities under the consolidated foreign direct investment policy of 2017 (the “FDI Policy“).
CHANGES TO THE FDI POLICY
Setting forth the definitions of e-commerce, ecommerce entities, market place-based model and inventory-based model, the Press Note clarifies that 100% foreign direct investment is permitted, under the automatic route, in marketplace models of e-commerce and no FDI is permitted in inventory-based models of e-commerce. It thereafter sets forth other changes and conditions applicable to e-commerce entities. These changes will come into effect from February 1, 2019.
The new guidelines bar online retailers from selling products of companies in which they own stakes. The Press Note states that 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.
Inventory Based or Marketplace Based
The Press Note further explains that a marketplace e-commerce entity shall not own or exercise control over the goods sold on the platform. Any ownership or control over the goods sold by the market place entity will render the entity into an inventory-based model. The Press Note clarifies that the inventory of a vendor will be deemed to be controlled by the e-commerce marketplace entity if more than 25% of the purchases of the vendor are from the marketplace entity or its group companies. The 25% cap was there earlier, but the onus of ensuring it, is now firmly on the e-commerce platform, so that it does not find itself on the wrong side of the law.
The new norms also bar exclusive tie-ups between e-commerce entities that follow the ‘marketplace model’ and sellers using their platform. An e-commerce entity is prohibited from directing a seller to exclusively sell only on one platform. This move may affect smartphone brands that till date have exclusively operated as online-exclusive brands on online marketplaces like Amazon India and Flipkart.
Services Offered by the E-Commerce Entity
In a marketplace model, the e-commerce firm is not allowed to directly or indirectly influence the sale price of goods or services, and is required to offer a level playing field to all vendors. That is to say that services offered by the e-commerce entity are to be offered to all vendors on the platform in a fair and non-discriminatory manner and at arm’s length basis. These services include, among other things, quick delivery, logistics, warehousing, advertising, marketing, payments and financing.
The Press Note has introduced a new requirement for all e-commerce marketplace entities to furnish to the Reserve Bank of India (the “RBI“), a certificate along with a report of a statutory auditor,confirming compliance with the guidelines under the Press Note, by the 30th of September every year, for the preceding financial year. Therefore, the first set of compliance documents, will have to be submitted to the RBI by September 30, 2019, for the financial year 2018-2019.
The revamped e-commerce norms are stricter in nature and will force online retailers such as Amazon and Walmart owned Flipkart and Myntra to tweak their business plans and revisit their India plans going forward. The policy seems to be aimed at plugging the multiple loopholes that existed in FDI regulations governing the e-commerce sectors as well as tackling the anti-competitive behaviour of e-commerce entities. E-commerce companies will have to go back to the drawing board and see if their business models comply with the new requirements that are effective prospectively from February 1, 2019.