India's e-commerce business has exploded in recent years and continues to thrive. The market is expected to rise by 84% to 111 billion dollars by 2024, aided by the pandemic. Selling and buying services and goods, including digital products, over a digital and electronic network is e-commerce. Platforms like Salt have further facilitated the growth of businesses with borderless banking and a secure network of financial accounts. Companies integrated under the Companies Act of 2013 that perform e-commerce operations or have an e-commerce marketplace are e-commerce startups.
Foreign Direct Investment (FDI) in India can result in a capital infusion by boosting the growth of the e-commerce ecosystem. In recent years, e-commerce startups that use the marketplace model have seen tremendous development. The inventory-based e-commerce enterprises, on the other hand, have not reaped the benefits of the FDI policy reforms in India.
The Indian government changed its foreign direct investment policy in 2020, making it mandatory for corporations of neighbouring countries of India to obtain government clearance before investing in Indian companies. According to a source, this was implemented to "deter 'opportunistic' takeovers and acquisitions due to the pandemic."
FDI Policy on E-Commerce activities
The equity/FDI cap on e-commerce activity is set at 100% through the automatic route under India's FDI policy. However, startups and entities should focus on Business to Business (B2B) e-commerce rather than Business to Consumer (B2C) e-commerce.
While the FDI Policy enables 100% FDI through the automatic route for the marketplace model of e-commerce activities, it is not allowed in the inventory-based model of e-commerce activities.
The marketplace-based e-commerce model entails an e-commerce startup or company providing an information technology platform on a digital and electronic network, functioning as a facilitator between the buyer and the vendor.
The inventory-based e-commerce model describes e-commerce operations in which an e-commerce corporation or business owns and sells items and services directly to customers.
Regulations
The FDI policy allows e-commerce activities under the following regulations. They are,
On a B2B basis, marketplace e-commerce businesses can transact with the sellers who have registered on their platform.
The inventory, or the products purported to be sold, cannot be controlled or owned by e-commerce businesses that provide marketplaces. The e-commerce business becomes an inventory-based model due to such control or ownership over the inventory.
Any entity with equity participation or inventory control by e-commerce marketplace entities or their group companies is not permitted to offer its items on marketplace entity-run platforms.
The services/goods available for sale electronically on the marketplace-based model's website must display the sellers' name, address, and other contact information. After the goods/products have been sold, the seller is responsible for delivering the goods to the clients and ensuring their happiness.
In the marketplace model, e-commerce businesses can support payment for sales following Reserve Bank of India (RBI) norms.
The sellers are responsible for any guarantee/warranty of services and items offered in the marketplace model.
E-commerce businesses that provide a marketplace shall not affect the sale price of services and goods in any way, and they should preserve a level playing field.
An e-commerce marketplace entity or another company in which the e-commerce marketplace entity has indirect or direct equity participation or common control shall provide services to vendors on the e-commerce platform at arm's length and in a non-discriminatory and fair manner.
The rebate offered to buyers by group companies of marketplace entities should be non-discriminatory and equitable. It is considered unfair and discriminatory to provide services to any vendor on specific terms unavailable to other vendors in similar circumstances.
An e-commerce marketplace should not require a vendor to offer a product solely on its platform.
E-commerce marketplace businesses with FDI will be required to keep and acquire a statutory auditor's report for the previous financial year by the 30th of September each year, certifying compliance with e-commerce rules.
Now let us look at the policies for manufacturing, wholesale trading, single brand, and multi-brand companies.
E-Commerce Manufacturing
The FDI Policy allows firms to sell their manufactured goods in India via retail and wholesale, including e-commerce, without obtaining government approval, i.e., via the automatic method. On the other hand, manufacturing companies can offer their food goods developed or manufactured in India for retail trading via e-commerce with 100% FDI if they get a government license.
E-Commerce Wholesale Trading
Businesses engaging in B2B e-commerce trading, whether in cash and carry wholesale trading, are eligible for a 100% automatic approval route under the FDI Policy. Selling goods or merchandise to merchants, commercial, industrial, institutional, and professional business users, and connected subordinated service providers fall under wholesale trade. It refers to sales made for a business, trade, or profession rather than personal use.
E-commerce Single Brand Retail Trading
The FDI Policy allows 100% FDI through the automatic method for firms involved in single-brand retail trading. E-commerce can also be used by single-brand retail trade organizations that operate through physical and mortar establishments. Selling goods of the same brand is referred to as single-brand retailing.
For enterprises with FDI engaged in multi-brand retail trading, the FDI Policy prohibits retail trading in any form through e-commerce. Multi-brand retail trading refers to the sale of various products from numerous brands on a single platform.
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