FEMA guidelines for FDI in e-commerce entities

FEMA guidelines for FDI in e-commerce entities

E-commerce’ means buying and selling of goods and services including digital products over digital & electronic network.

‘E-commerce entities’ are the following entities conducting the e-commerce business:
  •    a company incorporated under the Companies Act, 1956 or the Companies Act, 2013.
  •   a foreign company covered under section 2 (42) of the Companies Act, 2013.
  •   an office, branch or agency in India owned or controlled by a person resident outside India.

There are three models in which e-commerce entities conduct their business activities which are as mentioned below:

a.     B2B E-commerce: The entities conducting B2B e-commerce would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well. Guidelines on cash and carry wholesale trading apply to B2B e-commerce activities also.
b.  ‘Inventory based model of e-commerce’means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.

    It is noteworthy that foreign investment is not permitted in Inventory based model of e-commerce.
c.     ‘Market place model of e-commerce’means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

    It is pertinent to mention here that 100% foreign investment under automatic route is  permitted in ‘Market place model of e-commerce’.

    Further there are certain other conditions which need to be complied by ‘Market place model of e-commerce’ which are as follows:
(i)     Digital & electronic network mentioned above will include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc.
(ii)    Marketplace e-commerce entity is permitted to enter into transactions with sellers registered on its platform on B2B basis.
(iii)    Marketplace e-commerce entity is permitted to provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services. Order fulfilment services relate to receiving, processing and delivering orders to end customers.
(iv)      Marketplace e-commerce entity cannot exercise ownership or control over the inventory i.e. goods purported to be sold.

            Explanation: Inventory of a vendor will be deemed to be controlled by marketplace e-commerce entity if more than 25% of purchases of such vendor are from the marketplace e-commerce entity or its group companies which will render the business of marketplace e-commerce entity into inventory based model, in which FDI is not permitted.
(v)      An entity having equity participation by e-commerce marketplace entity or its group companies or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.  
It means that the market place e-commerce entity will not sell the products of any vendor on its platform where (i) the marketplace entity or its group companies has contributed in the share capital of such vendor company or (ii) where more than 25% of purchases of such vendor are from the marketplace e-commerce entity or its group companies.
In this connection it may pertinent to point out that prior to amendment to FDI regulations on 31 January, 2019, which came into force from 1 February, 2019, as per earlier FDI regulations, E-commerce entity providing a marketplace could not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory was to render the business of the marketplace entity into inventory based model. Further, an e-commerce entity was not to permit more than 25 percent of the sales value on financial year basis affected through its marketplace from one vendor or their group companies.
In other words, as per amended regulations, the marketplace e-commerce entity is not permitted to own any shares of the vendor company. Earlier there was no concept of control of the vendor company by the marketplace e-commerce entity. As per amended regulations the marketplace e-commerce entity which the owns (in part or full) the vendor company or controls the inventory of the vendor company, is not allowed to sell the products a such a vendor on the platform run by such marketplace entity.

(vi)     For the goods/ services that are made available for sale electronically on website, marketplace e-commerce entity is required to clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction is the responsibility of the seller.
(vii)   Payments for sale may be facilitated by the marketplace e-commerce entity in conformity with the guidelines issued by the Reserve Bank in this regard.
(viii)     Any warranty/ guarantee of goods and services sold is also the responsibility of the seller.
(ix)         E-commerce entities providing marketplace will not, directly or indirectly, influence the sale price of any goods or services and shall maintain level playing field. Services should be provided by e-commerce marketplace entity or other entities in which e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors on the platform at arm’s length and in a fair and non discriminatory manner.
Explanation: Such services will include but not limited to fulfilment, logistics, warehousing, advertisement/marketing, payments, financing etc. Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purposes of this clause, provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.
Prior to amendment the relevant regulation read as under: E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.

It did not talk of the provisions of services to the vendors in fair and non-discriminate manner.
(x)         No e-commerce marketplace entity can mandate any seller to sell any of their product exclusively on its platform.
(xi)      All existing investments are mandated to be in compliance with the above conditions with effect from 1 February, 2019.
Annual Compliances under FEMA:
The e-commerce entity is now required to annually furnish a certificate along with a report of statutory auditor to the Reserve Bank of India, confirming compliance of the e-commerce guidelines.
While the e-commerce sector in India has seen tremendous growth in the past few years, it will be interesting to see how much impact these policy measures will have in the long run and how the e-commerce giants will comply with these norms.

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