Indian Government allows foreign direct investment (FDI) for the marketplace model for e-commerce

Posted: 05/04/2016

The Government of India issued Press Note 3 (2016 Series) on 29 March 2016 through the Ministry of Commerce & Industry to permit 100% foreign direct investment (FDI) under automatic route in online retailing of goods and services under the so-called “marketplace” model. To date, India has allowed 100% foreign investment in business-to-business (B2B) e-commerce but not in retail e-commerce (ie business-to-consumer, or B2C).

There are two models of e-commerce for businesses. The first is known as the “marketplace‟ model, which provides a platform for business transactions between buyers and sellers. In return for the services provided, the platform earns commission from the sellers of goods/services. The ownership of the inventory in this model rests with the enterprises which advertise their products on the website and are the ultimate sellers of goods or services. The marketplace model thus works as a facilitator of e-commerce. 100% FDI is permitted under automatic route in marketplace model of e-commerce.

The second model is “inventory based”. In this model, the inventory of goods and services is owned by the e-commerce entity and is sold to the consumers directly rather than being a facilitator of e-commerce. Unlike the marketplace model of e-commerce, FDI is not allowed in the inventory based model.

Key aspects of Press Note 3 are:

• E-commerce is defined as “buying and selling of goods and services including digital products over a digital and electronic network”.
• FDI in business-to-consumer (B2C) e-commerce is permitted in the following circumstances:

(a)  A manufacturer would be permitted to sell its products manufactured in India through e-commerce retail.

(b)  A single brand retail trading entity operating through bricks and mortar stores would be permitted to undertake retail trading through e-commerce.

(c)  An Indian manufacturer would be permitted to sell its own single brand products through e-commerce retail. The Indian manufacturers would be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, at most, 30% from Indian manufacturers.

• An e-commerce entity providing a marketplace model will not be permitted to affect more than 25% of the sales from one vendor or their group companies. 

The marketplaces entities which rely heavily on one or a small number of vendors for sales may need restructuring. They will also need to regularly monitor their sales to avoid exceeding the threshold of 25% from a single vendor which might expose them to the breach of FDI norms.

• An e-commerce entity will not exercise ownership over the inventory and any warranty/guarantee of goods and services is required to come from the seller;
• The e-commerce marketplace can provide support services to sellers such as logistics, warehousing, order fulfilment, call centres and payment collection but they cannot influencing the sale price of goods and services directly or indirectly. 

The Indian Government wants e-commerce entities to have the same level of disengagement as in a physical marketplace such as a mall, where the operator has no interaction with the consumer. This means that companies like Flipkart, Snapdeal, Amazon and others running online marketplaces are not only barred from giving discounts directly but they may not be able to offer promotional programmes such as cash-back offers to lure shoppers either. 

Commenting on Press Note 3, Rustam Dubash, head of the Penningtons Manches India group and commercial dispute resolution team, said: “As e-commerce has attracted a substantial amount of foreign investment, the Press Note will be appreciated by foreign investors for bringing some clarity into this high-growth sector.”

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