India has allowed 100% foreign investment in business-to-business (B2B) e-commerce but none in retail e-commerce i.e., business-to-consumer, or B2C. According to the press note issued by the department of industrial policy and promotion (DIPP), a marketplace model is an information technology platform run by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. However, DIPP has prohibited FDI in e-commerce companies that own inventories of goods and services and sell directly to consumers using online platforms.The marketplace e-commerce companies will be allowed to provide support services to sellers on their platform such as warehousing, logistics, order fulfilment, call centre and payment collection.The government in the budget allowed 100% FDI in marketing of food products produced and manufactured in India. In November last year, the government also allowed a manufacturer to sell its products manufactured in India through retail e-commerce.
A. Inventory Based Model vs. Marketplace Mode
The inventory based model has been defined as an E-Commerce activity where inventory of goods and services is owned by E-Commerce entity and is sold to the consumers directly where as in the marketplace model, an E-Commerce entity provides an information technology platform on a digital and electronic network where the entity acts as a facilitator between buyer and seller.
The Guidelines go on to state that 100% FDI under automatic route is permitted in marketplace model of E-Commerce. FDI is not permitted in the inventory based model of E-Commerce.
B. FDI in B2B and B2C E-Commerce
The Guidelines have also, in a consolidated manner, reiterated the recent amendments made in the E-Commerce sector last year, and stated as under:
i) FDI is permitted up to 100% under automatic route in Business to Business ("B2B") E-Commerce.
ii) No FDI is permitted in the Business to Consumer ("B2C") E-Commerce, except in the following circumstances:
a. A manufacturer will be permitted to sell its manufactured products in India through E-Commerce retail.
b. A single brand retail entity operating through brick and mortar store is permitted to undertake retail trading through E-Commerce.
c. An Indian manufacturer is permitted to sell its own single brand products through E-Commerce retail. Indian manufacturer 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.
C. Other Sectoral Conditions
The Guidelines also enumerate certain other conditions applicable to E-Commerce sector, such as:
i) Although an E-Commerce marketplace entity will be permitted to enter into transactions with sellers registered on its platform on Business to Business ("B2B") basis, the E-Commerce entity providing the marketplace will not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory will render the business into an inventory based model in which FDI is not permitted.
ii) An E-Commerce entity cannot permit more than 25% of the sale affected through its marketplace, from one vendor or its group companies.
iii) Goods/services made available on the marketplace website are to clearly provide the name, address and other contact details of the seller who shall be solely responsible for - delivery of goods, their warranty/guarantee and customer satisfaction subsequent to the sale and the warrantee/guarantee of the goods/services sold.
iv) Payments for such sale may be facilitated by the E-Commerce entity to the seller in conformity with the guidelines of the Reserve Bank of India ("RBI").
v) Another critical condition introduced seems to be regarding market competition, where the Guidelines simply state that "E-Commerce entities providing marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain level playing field." The origin of this condition perhaps lies in the ongoing feud between online and offline (brick and mortar) retailers, who have alleged that the marketplace companies follow the practice of predatory pricing and influence prices of the goods to offer unsustainable discounts. With this condition, the onus for maintaining a level playing field seems to have been shifted to the marketplace.
Options available to foreign investors:
The Finance Minister in his budget speech on 10th July, 2014 announced that the government is considering opening up the e-commerce route for foreign investors in the manufacturing sector looking to sell their products/services through B to C i.e. Business to Consumer. It is pertinent to note that the aforementioned modification only allows manufacturers to sell directly to consumers, and FDI with respect to wholesalers and retailers selling directly to customers is still prohibited.
The following options may be availed by foreign investors who wish to conduct B2C E-commerce activities in India:
Market Place model: Foreign brands are not allowed to sell directly to consumers in India online, however customers are still able to visit their websites and place orders online. This is possible because such online portals use the “Market Place Model” which is essentially setting up a portal that acts as a middleman between buyers and sellers. The Company does not store any inventory and sources all materials directly from the manufacturers based on orders received.
Franchisee: The franchisee model involves appointing a local Indian franchisee to operate the business/brand of the foreign investor. There is no restriction on an Indian owned franchisee to engage in B2C e-commerce activity. Further, the relationship between the foreign company/brand and its franchisee would constitute as a B2B activity. However, the foreign investor would not be allowed to acquire shareholding in the Indian franchisee conducting such e-commerce activity.
The investment policy for trading companies
Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route :
i. 100% FDI is permitted in case of trading companies for the following activities:
- bulk imports with ex-port/ex-bonded warehouse sales,
- cash and carry wholesale trading,
- other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.
ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:
a. Companies for providing after sales services ( that is not trading per se)
b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India.
c. Trading of hi-tech items/items requiring specialised after sales service
d. Trading of items for social sector
e. Trading of high-tech, medical and diagnostic items.
f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name.
g. Domestic sourcing of products for exports.
h. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years , and investment in setting up manufacturing facilities commences simultaneously with test marketing.
i. FDI upto 100% permitted for e-commerce activities. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.