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. With a view to make clear 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 e-commerce zone was authorised underneath one hundred% automated route for entities that carry out commercial enterprise on 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 become no longer authorised under computerized route in entities engaged in enterprise to patron (“B2C”) model and inside the stock based version of e-commerce. Inventory based totally version of e-trade become described under to mean an e-trade interest wherein inventory of goods and offerings is owned by way of e-trade entity and 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 by means of 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 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 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) (“TISPRO Regulations”) have been amended pursuant to Foreign Exchange Management (Transfer or Issue of Security by means of 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 inventory based totally version in the event that they exercised “ownership” over the inventory. Now underneath PN 2 of 2018 they will be dealt with as 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 manage is direct or indirect.
Under PN 3 of 2016 read with the FDI Policy of 2017, the FDI Entity turned into now not accepted to impact more than 25% of the income from one vendor or its institution business enterprise on a financial yr basis. Now beneath PN 2 of 2018, if 25% of the sales of the vendor are effected on the platform of the FDI Entity then the FDI Entity will be deemed to have manipulate over the stock sold with the aid of such seller. The duration of computation of such income is not specified both in PN 2 of 2018 or the Amendment Regulations.
This would also imply that the FDI entity ought to confirm the total quantity of sales of each of its companies 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 become no such condition underneath the PN 3 of 2016.
The PN 2 of 2018 is silent at the 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 due to the fact that in which the PN 2 of 2018 intended to cover “oblique” manage it has clearly spelt that out (as an example in clause (ix)).
The percent of fairness participation is likewise now not provided for. Further, an difficulty could stand up on the brink of fairness participation i.E. Whether or not conserving even one proportion constitutes fairness participation. In absence of rationalization a possible view might be that even single proportion could constitute equity participation.
An issue additionally arises whether or not 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 a view that till the time convertible devices are transformed into fairness stocks, the convertible have to not be 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 to: (i)exercising twenty-six percent or extra of voting rights in different employer; or (ii)hire extra than fifty percent of contributors of board of directors in the other enterprise.

Under PN 2 of 2018, FDI Entity is limited from compelling any supplier to promote its merchandise, exclusively at the platform of FDI Entity.

Fairness Requirement:
FDI Entity isn’t always accepted to directly or not directly affect the sale rate of the goods or offerings and to hold stage gambling subject.
Services such as logistics, warehousing, advertisement/advertising and marketing, payments, financing and many others. Supplied through the FDI Entity or entities where FDI Entity has direct or indirect fairness participation or commonplace control to the providers selling items on platform of FDI Entity will need to be non-discriminatory, honest and on arm’s period basis. Further, any cashback gives provided by using the group businesses of FDI Entity will should be fair and non-discriminatory.
FDI Entities due to backing of world traders are in function to provide deep reductions or entail in predatory pricing which the neighborhood retailers can’t compete with. The aforesaid requirement of maintaining level playing subject and to have honest and non-discriminatory terms shall gain the nearby outlets not having backing of worldwide investors.