FDI Regulations That E-commerce Startups Must Know

India’s e-commerce market has grown significantly in recent years and is still flourishing. E-commerce startups have been incorporated in the recent past. E-commerce startups are companies incorporated under the Companies Act, 2013, conducting the e-commerce business or having an e-commerce marketplace. E-commerce business means selling and buying of services and goods, including digital products, over a digital and electronic network. 

The Foreign Direct Investment (FDI) in the e-commerce startup ecosystem can lead to an influx of capital and enhance its growth potential in India. E-commerce businesses utilising the marketplace model have registered significant growth in the recent past. However, the e-commerce businesses utilising the inventory-based model have not received favourable benefits from the FDI Policy changes in India.

The Department of Industrial Policy and Promotion (DIPP) has also issued the ‘Consolidated FDI Policy Circular of 2020’ (“FDI Policy”), which provides the Foreign Direct Investment (FDI) guidelines for e-commerce activities in India. This ‘Consolidated FDI Policy Circular’ came into effect on 15th October 2020. 

FDI Policy on E-commerce Activities

Under the FDI Policy in India, the Equity/FDI cap on e-commerce activities is set at 100% through the automatic route. However, e-commerce startups and entities should engage only in the Business to Business (B2B) e-commerce and not in the Business to Consumer (B2C) e-commerce.

The FDI Policy allows 100% FDI under the automatic route for the marketplace model of e-commerce activities. However, FDI is not permitted for the inventory-based model of e-commerce activities. 

The marketplace based model of e-commerce means providing an information technology platform by an e-commerce startup or entity on a digital and electronic network, acting as a facilitator between the buyer and the seller. 

The inventory-based model of e-commerce means e-commerce activities where the inventory of goods and services is owned by an e-commerce startup or entity and is sold to the consumers directly. 

Guidelines For FDI On E-commerce Activities

The FDI policy allows e-commerce activities under automatic route with 100% equity/FDI cap for the marketplace based model of e-commerce, subject to the following conditions:

• Digital and electronic networks in the e-commerce business include a network of television channels, computers, and any internet applications used in an automated manner such as extranets, web pages, mobiles, etc. 
• The marketplace e-commerce entities are permitted for entering into transactions with the sellers registered on their platform on a B2B basis. 
• E-commerce marketplace can give support services to sellers regarding logistics, warehousing, payment collection, call centre, order fulfilment and other services. 
• E-commerce entities providing marketplace cannot exercise control or ownership over the inventory, i.e. the goods professed to be sold. Such control or ownership over the inventory renders the e-commerce business into an inventory-based model. 
• Any entity having equity participation by e-commerce marketplace entities or their group companies or having control on its inventory by e-commerce marketplace entities or their group companies are not permitted to sell its products on such marketplace entity run platforms. 
• The services/goods available in the marketplace based model for sale electronically on its website must clearly provide the sellers’ name, address, and other contact details. After the goods/products are sold, the delivery of goods to the customers and their satisfaction is the seller’s responsibility. 
• In the marketplace model, the payments for sale can be facilitated by the e-commerce entities in conformity with the Reserve Bank of India (RBI) guidelines. 
• Any guarantee/warranty of services and goods sold is the sellers’ responsibility in the marketplace model. 
• The e-commerce entities providing a marketplace should not directly or indirectly influence the sale price of the services and goods, and it should maintain a level playing field. 
• Services must be provided to vendors on the e-commerce platform at arm’s length and in a non-discriminatory and fair manner by an e-commerce marketplace entity or other entity in which the e-commerce marketplace entity has indirect or direct equity participation or common control. 
• The cashback given by the group companies of marketplace entities to the buyers should be non-discriminatory and fair. Providing services to any vendor on specific terms that are not available to other vendors in similar circumstances shall be deemed unfair and discriminatory. 
• An e-commerce marketplace entity should not mandate a seller to sell any product only on its platform exclusively. 
• E-commerce marketplace entities with FDI will have to maintain and obtain a statutory auditor’s report by 30th September every year for the prior financial year, confirming the compliance of e-commerce guidelines.

FDI Policy For Manufacturing Entities Selling on E-commerce

The FDI Policy permits manufacturers to sell their manufactured products in India through retail and/or wholesale, including e-commerce, without government approval, i.e. under automatic route. However, the manufacturing entities can sell their food products produced or manufactured in India for retail trading through e-commerce under 100% FDI under the government approval route.

FDI Policy For E-commerce Wholesale Trading Entities 

The FDI Policy permits businesses engaged in B2B e-commerce trading, either in cash and carry wholesale trading/wholesale trading through a 100% automatic approval route. Wholesale trading means selling goods or merchandise to retailers, commercial, industry, institutional and professional business users and related subordinated service providers. It implies sales for the purpose of business, trade or profession and not for personal consumption.

FDI Policy For E-commerce Single-Brand Retail Trading Entities

The FDI Policy permits 100% FDI through automatic route for entities engaged in single-brand retail trading. Single-brand retail trading entities operating through brick and mortar stores can undertake retail trading through e-commerce. Single-brand retail trading means selling goods of the same brand.

FDI Policy For E-commerce Multi-Brand Retail Trading Entities

The FDI Policy prohibits retail trading in any form through e-commerce for the companies with FDI engaging in the activities of multi-brand retail trading. Multi-brand retail trading means selling different products of various brands through one platform. 

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice. It should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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