India is one of the most leading countries in the field of E-commerce and FDI, with India’s E-commerce industry on an upward trajectory with a YoY growth of 5% and with an estimated revenue of $56.6 Billion in 2021. India’s huge and still-expanding base of internet users also includes increasingly larger penetration rates into rural markets. As of April 2021, the number of internet connections in India significantly increased to 782.86 million, driven by the ‘Digital India’ program. Out of total internet connections, 61% of connections were in urban areas, of which 97% connections were wireless.
Among the fastest growing domestic segments, the most popular categories were tours & hotel reservations; airline and railway tickets; and lifestyle and entertainment related products. The Indian online grocery market is estimated to reach US$ 18.2 billion in 2024 from US $1.9 billion in 2019, expanding at a CAGR of 57%.
India’s E-commerce orders volume increased by 36% in the last quarter of 2020, with the personal care, beauty, and wellness (PCB&W) segment being the largest beneficiary. India’s consumer digital economy is expected to become a USD 800 billion market by 2030, growing from USD 537.5 billion in 2020, driven by the strong adoption of online services such as E-commerce and EdTech in the country. Online retail sales in India are expected to grow 31% to reach US$ 32.70 billion in 2018, led by Flipkart, Amazon India, and Paytm Mall.
The government of India has been striving to regulate the E-commerce retail market in an effective way dating back to its first attempts in the year 2000. Numerous fundamental concerns are important to consider and relate to the approach of the Indian government towards E-commerce retail. The department of individual policy and promotion which is also called DIPP, issued the Consolidated FDI policy circular which provides the FDI guidelines for E-commerce activities in India. The foreign direct investment (“FDI”) regulations pertaining to E-commerce is contained in Paragraph 5.2.15.2 of the Consolidated Foreign Direct Investment Policy of the Government of India dated the 15th of October 2020 (“FDI Policy”).
Guidelines for FDI on E-commerce Business or Activities
Under the FDI Policy in India, 100 percent FDI under the field of the automatic route is permitted for marketplace models of E-commerce activities. Although it was also noted that FDI is not accessible for the inventory-based model of E-commerce activities. The E-commerce marketplace, which is mainly based on models of E-commerce, ensures to provide an information technology platform by the E-commerce startup or the entity on a digital and electronic network. This also acts as the facilitator between the buyers and the seller. The models of E-commerce which are based on inventory, refer to E-commerce activities where the inventory of the goods and services are owned by the E-commerce startup, or entities and is sold to the consumer through indirect methods.
Some of the important guidelines that are related to FDI on E-commerce activities are listed below.
Services need to be provided to vendors on the E-commerce platform incorporating the arm’s length principle and in the form of non-discrimination. It is important to access fairness within the E-commerce Marketplace in which the E-commerce marketplace entity has direct or indirect equity participation.
Special treatment to any individual on these specific terms is not permitted. By offering services to any vendors on specific terms which are not available to other vendors in similar circumstances can be considered unfair and discrimination. According to the FDI for E-commerce activities or business, any E-commerce marketplace entity should avoid mandating a seller to exclusively engage in any goods/services on its platform.
Within the E-commerce marketplace models, E-commerce entities are allowed to enter transactions with sellers who are registered on the platform based on business-to-business relations. However, the E-commerce entities that provide a marketplace model are not allowed to exercise control or ownership over the investor. Such type of control and ownership over the investor renders the E-commerce business into an inventory-based model.
Any entity that has equity participation by the E-commerce marketplace entities or their group companies or by having control on the inventory by the E-commerce Marketplace entities or their group companies are also not allowed to sell their products on such marketplace entity run platform
A clear mandate under the FDI policy for service and goods that are available in the marketplace which is mainly based on the model for the sale electronically on their website, is that vendors need to provide the name of the seller, seller address, contact details, and other useful information in a clear form. As soon as the goods and services are sold then it’s the responsibility of the seller to meet the satisfaction level of the customer and provide the delivery of goods to the doorstep of the customer. It’s the responsibility of the sellers to provide a warranty and guarantee along with the goods and services to the customer in the marketplace model.
It is also crucial for E-commerce marketplace entities who have FDI to maintain and to obtain a statutory auditor’s report by the 30th of September every year for the finances of prior years.
Conclusion
It is clear from the E -commerce Policy that the Government proposes to bring in strategies to ensure that the FDI Policy is more strictly regulated. Once the draft policy is published there will be more clarity on the mechanism to be followed by E-commerce entities and the regulations to which they will have to adhere to. For instance, E-commerce entities will be required to ensure that their processes are not biased and are not partial towards any seller on the platform, which is one of the key premises of the policy.
We at D’Andrea and Partners have a team of experts who are continually monitoring the changes in the Indian laws and regulations. Reach out to us on info@dandreapartners.com if you have any questions.
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