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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.
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.
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:
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.
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.
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.
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.
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