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FDI norms in e-marketplace: Legal take on nuts and bolts

Abhilekh Verma and Sanjay Khan Nagra

Abhilekh Verma and Sanjay Khan Nagra

The Department of Industrial Policy and Promotion (DIPP) has finally, by Press Note #3 of 2016 Series (PN3) stated that 100 per cent foreign direct investment (FDI) is allowed under the automatic route in “marketplace model of e-commerce”.

PN3 specifically defines what a “marketplace model” is and what an “inventory model” is. It clarifies that no FDI is permitted in the “inventory mode”, and also as to what is permitted and prohibited for marketplaces.

Key permitted item for marketplaces is provision of support services to sellers (warehousing, logistics, order fulfilment, call centre, payment facilitation/collection, etc). On the other hand, key prohibited items include sale of more than 25 per cent of the total sales by a single vendor/group, and influence of the marketplace in the sale price.

The above, and the language of PN3 at certain places, are likely to have material impact on certain important aspects of e-commerce business in India. These include the following:

  • It appears that PN3 has been worded and presented as a “clarification”. It remains to be seen whether the courts will interpret it as a retrospective application of the law (a case is going on in the Delhi High Court).
  • PN3 permits marketplaces to collect/facilitate payments on behalf of the sellers subject to compliance with the applicable guidelines of the Reserve Bank of India. This is a big relief.
  • There is a 25 per cent cap on sales by a seller (and its group companies). This is in line with a similar restriction in FDI in wholesale trade. This will ensure broad-basing of sellers, and force the players to move to a “pure play marketplace” model. One can expect quite a bit of restructuring in the backend space to address this.
  • It needs to be seen as to how the prohibition on influencing the sale price of goods and services will affect the existing players. This will force the players to move to a “pure play marketplace” model, and not be involved in the “sale and purchase” aspect. This is likely to have immediate impact on the industry, and once again, substantial restructurings can be expected to address this.
  • Permission to provide support services to sellers is a welcome move, and one can expect more investment on e-commerce ecosystem (as against being utilised mainly for deep discounts).
  • The language of PN3 implies that sale of “digital goods” in an inventory model is prohibited. The lack of clarity on what is meant by “digital goods” creates ambiguity for players that are involved in the business of providing online content, among others.
  • Sale of services is prohibited under the inventory model. However, PN3 separately clarifies that sale of services through e-commerce is permitted under the automatic route subject to other laws. While this appears to be an exception to the prohibition on sale of services under the inventory model, an express clarification in respect would help. In any event, this should not hit pure play aggregators of services.
  • PN3 seems to include “foreign companies” within the definition of an “e-commerce entity”, even where such companies do not have a place of business in India, and are merely selling goods/providing services from outside India. This appears to be an exercise beyond the jurisdiction of DIPP, and should be clarified

On a whole, PN3 is a commendable move, primarily because it states the government’s stand on FDI in e-commerce. A clear policy will help investors and other stakeholders take informed decisions, and structure businesses with more certainty. This should bolster more investments in the sector. While, as mentioned above, quite a few things may need to be corrected/restructured by the existing players, and a few new issues emerge from PN3, the overall impact of PN3 should be positive. One hopes that the government continues with this trend, and sorts out the few remaining/new issues as well.

Abhilekh Verma is a partner and Sanjay Khan Nagra is an associate at Khaitan & Co. Views are personal.

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