Government permits 100 per cent FDI in e-commerce

This is only for the market place format of e-commerce, where the company provides a platform to act as a facilitator between buyer and seller.

March 29, 2016 05:40 pm | Updated November 17, 2021 01:04 am IST - New Delhi

The government on Tuesday allowed 100 per cent foreign direct investment (FDI) through the automatic route in the marketplace model of e-commerce retailing, bringing in long overdue clarity on FDI policy for the sector as well as definition of marketplace format.

As per the guidelines issued by the Department of Industrial Policy and Promotion (DIPP) on FDI in e-commerce, foreign direct investment has not been permitted in inventory-based model of e-commerce. At present, 100 per cent FDI is permitted in B2B (business-to-business) transactions under the automatic route.

The marketplace model of e-commerce has been defined as providing an “information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.”

These guidelines are expected to bring in more FDI into the sector that attracted maximum inflow of such investments in 2015, Akash Gupt, Partner and Leader Regulatory at PwC said.

DIPP said that the e-commerce marketplace may provide support services to sellers in warehousing and logistics.

However, such entities will not exercise ownership over the inventory. “Such an ownership over the inventory will render the business into inventory-based model,” it said in a press note.

As per the norms, an e-commerce firm will not be permitted to sell more than 25 per cent of total sales from one vendor or its group companies. “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 added.

This may require some of the existing players to alter their structures. “The cap of 25% on sales by a vendor on marketplace will ensure a broadbasing of vendors for a true marketplace. This may require some of the operators to go back to the drawing board to ensure compliance,” Mr. Gupt added.

Commenting on the announcement, Vivek Gupta, Partner at BMR Advisors said an explicit position from the government on where it stood with reference to e-commerce has been long overdue.

“However, the fact that this position has been stated after close to 10 billion dollars have been committed to the sector, networks and businesses already exist on the ground. Moreover, ongoing legal challenges and Enforcement Directorate meant that the government had very little elbow room to really state a policy position. And hence, it has chosen to bless the marketplace model with some safeguards that the marketplace should not act like the retailer.”

While welcoming the guidelines, Kumar Rajagopalan, CEO of Retailers Association of India said the definitions in the notification will prevent marketplaces from behaving like “pseudo retailers.”

Nasscom said the cap of 25 per cent on sales by a single vendor in a marketplace may prove to be restrictive, more so if the vendor sells high value items. “The industry might face difficulties in case of sale of electronic items, where a vendor may be offering exclusive access to certain items or discounts. Marketplaces have no control on how a product is priced and only organise ‘sales’ where vendors participate,” it added.

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