India: Recent Developments In FDI On E-Commerce

The FDI coverage on e-commerce first reported via Press Note 2 of 2000 permitted a hundred% FDI in business to enterprise (“B2B”) e-trade activities. To clarify the already existing policy framework, after extensive stakeholder consultations, Press Note three turned into issued with the aid of DIPP in 2016 dated 29 March 2016 (“PN 3 of 2016”). Under the PN 3 of 2016, FDI in the e-commerce zone was authorized underneath one hundred% automated route for entities that carry out commercial enterprise on a B2B basis and function on a market-based totally model of e-trade. The marketplace-based totally model of e-commerce turned into defined below PN 3 of 2016 to intend supplying of information technology platform with the aid of an e-trade entity on a digital & electronic network to act as a facilitator between consumer and vendor. Under the aforesaid press note,

FDI becomes no longer authorized under computerized route in enterprise to patron (“B2C”) model and inside the stock-based version of e-commerce. The inventory-based total version of e-trade becomes described as an e-trade interest wherein inventory of goods and offerings is owned by an e-trade entity. It is offered to the purchasers without delay. B2C e-commerce, that is, multi-logo retail thru inventory primarily based version, has all along remained prohibited for FDI.

The regulations imposed using PN 3 of 2016 did no longer attain the reason of the regulator to limit FDI in stock primarily based e-trade model for the reason that aforesaid restrictions had been being circumvented via strange arrangements. Consequently, the Department of Industrial Promotion and Policy (“DIPP”) issued Press Note No. 2 (2018 Series) dated 26th December 2018 (“PN 2 of 2018”) imposing further regulations on such e-commerce entities that have these days come into force on 1st February 2019 and are analyzed hereunder.

Under PN 2 of 2018, like in PN three of 2016, the FDI in the e-commerce zone is permitted beneath one hundred% automatic course for B2B version in marketplace primarily based version of e-commerce and not approved in B2C model and within the stock-based totally version of e-trade. The definition of the marketplace-based model of e-commerce and stock-based model of e-trade stays unchanged. The provisions of the Foreign

Exchange Management (Transfer or Issue of Security through a Person Resident outdoor India) Regulations, 2017 (Notification No. FEMA. 20 (R)/20 17-RB dated November 07, 2017) (“PRO Regulations”) have been amended under Foreign Exchange Management (Transfer or Issue of Security using a Person Resident out of doors India) (Amendment) Regulations, 2019 dated 31st January 2019 (hereinafter called the “Amendment Regulations”) to deliver the TISPRO Regulations in keeping with PN 2 of 2018.

Following are a number of the important adjustments added by using the PN 2 of 2018:
Ownership of Inventory

Earlier, the B2B e-trade marketplace entities having FDI (“FDI Entity”) had been handled as an inventory-based totally version if they exercised “ownership” over the inventory. Now underneath PN 2 of 2018, they will be dealt with as a stock-based model if the FDI Entity exercised “ownership or manage.” The time period “control” isn’t defined underneath the PN 2 of 2018. Further, it is silent whether the management is direct or indirect.
Under PN 3 of 2016, read with the FDI Policy of 2017.

The FDI Entity turned into not accepted to impact more than 25% of the income from one vendor or its institution business enterprise on a financial yr basis. The computation duration of such income is not specified in PN 2 of 2018 or the Amendment Regulations. Now beneath PN 2 of 2018, if 25% of the vendor’s sales are affected on the platform of the FDI Entity, then the FDI Entity will be deemed to have manipulated over the stock sold with the aid of such seller. This would also imply that the FDI entity ought to confirm each of its companies’ total quantity of sales to make sure compliance.

Equity Participation in the dealer entities

Under PN 2 of 2018, sellers are limited to promote their merchandise on systems run or furnished by way of a market entity if such market entity or its organization organizations have equity participation in the dealers or control over the stock. There becomes no such condition underneath the PN 3 of 2016. The PN 2 of 2018 is silent on whether the fairness participation is direct or indirect. In the absence of readability, a view may be taken that it might not cowl indirect equity participation because in which the PN 2 of 2018 intended to cover “oblique” manage it has clearly spelled that out (as an example in clause (ix)).

The percent of fairness participation is likewise now not provided for. Further, a difficulty could stand up on the brink of fairness participation, i.E. Whether or not conserving even one proportion constitutes fairness. In the absence of rationalization, a possible view might be that even a single proportion could constitute equity participation. An issue also arises whether equity participation would consist of convertible preference stocks, debentures, or warrants inside its purview.

In the absence of precise rationalization, it’s far viable to take the view that until convertible devices are transformed into fairness stocks, the convertible has not been handled as fairness participation. The Consolidated FDI Policy 2017 defines ‘Group Company’ to intend or more enterprises which, immediately or circuitously, are in a role too: (i)exercising twenty-six percent or extra of voting rights in different employer; or (ii)hire extra than fifty percent of contributors of the board of directors in the other enterprise.


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