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Indian Government Tightens Norms for e-commerce Companies

4th March 2019

The Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry, of the Government of India  issued Press Note No 2 (2018 Series) on 26 December 2018 (PN 2 of 2018).  The PN2 of 2018 provides clarity as to the Foreign Direct Investment (FDI) policy on the e-commerce sector and amends para – 5.2.15.2 of the Consolidated FDI Policy Circular 2017. Effective date of PN2 of 2018 is 1 February 2019.

The FDI policy on e-commerce, first pronounced through Press Note 2 of 2000, permitted 100% FDI in B2B e-commerce activities, subject to certain conditions.  However, FDI in entities engaged in B2C e-commerce, that is multi-brand retail through an inventory based model, has all along remained prohibited for FDI. Accordingly, through the latest PN2 of 2018, the Indian government has reiterated the policy provisions to ensure a better implementation of the policy.

Key Highlights

  1. 100% FDI under automatic route is permitted in the marketplace model of e-commerce.
  1. FDI is not permitted in the inventory based model of e-commerce.
  • Under PN2 regime, the ownership and control of inventory (goods purported to be sold) of the seller is not permitted. Furthermore, if more than 25% of the seller’s inventory is purchased from the marketplace entity or its group companies, then such inventory of the seller will be deemed to be controlled by the market place entity.

But it’s difficult for online marketplaces to track or monitor all sales from any vendor, given a vendor is free to sell their products across multiple online platforms and even offline. Furthermore, if platforms realise that the threshold of 25% percent has been crossed, they cannot recall or cancel a transaction which has already taken place to rectify the situation.

  • A seller having equity participation by marketplace entity or its group companies will not be permitted to sell its products on the platform run by such a marketplace entity.
  1. Services provided by the marketplace entity or other entities in which marketplace entity has direct or indirect equity participation, to the seller on their platform should be at an arm’s length basis and in a fair and non-discriminatory manner. Similarly, cash-back offer & provided by marketplace entity to buyers shall be fair and non-discriminatory.
  1. e-commerce entities providing a marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain a level playing field.
  1. Marketplace entities will be prohibited from mandating any seller to sell any product exclusively on their platform. But there is no guidance on how enforcing authorities would determine if a seller has been “mandated” to sell its products exclusively on an e-commerce platform, or it was a voluntary act.

 

  1. e-commerce market place entity will be required to furnish a certificate, along with a report of the Statutory Auditor to Reserve Bank of India, confirming compliance of the guidelines.

Although PN2 of 2018 is an attempt in right direction to make the marketplace model more robust and transparent, there are various concerns which require further clarity and immediate attention.

Article written by Ajit Mishra – Partner, Head of India Desk