The government on Wednesday said e-commerce companies would be barred from selling products sourced from firms in which they have stake in or control over.
This is a clarification issued by the Ministry of Commerce regarding the Consolidated FDI Policy Circular 2017. “100% FDI under automatic route is permitted in marketplace model of e-commerce,” the Commerce Ministry said. “FDI is not permitted in inventory-based model of e-commerce.”
Definition of control
The inventory-based model of e-commerce is when the inventory of goods and services is owned by the e-commerce entity and sold to consumers directly. The marketplace model is when an e-commerce company simply provides an information technology platform in order to act as a facilitator between the buyer and the seller. “E-commerce entity providing a marketplace will not exercise ownership or control over... goods purported to be sold,” the Ministry added. “Such an ownership or control over the inventory will render the business into inventory-based model. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.”
From the point of view of the vendor too, the clarification said that an entity with equity stake owned by an 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.
“In addition to the restrictions prescribed under the existing FDI policy, the DIPP clarification now states that inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies,” Atul Pandey, partner, Khaitan & Co. said.
The clarification also said an e-commerce marketplace will not force any seller to sell any product exclusively on its platform. “This clarification is targeted at plugging loopholes in the earlier policy,” Mr. Pandey added. “E-commerce marketplace entity will be required to furnish a certificate along with a report of statutory auditor to Reserve Bank of India, confirming compliance of the guidelines, by September 30 every year for the preceding financial year,” he said.