Government allows 100% FDI in e-commerce marketplace model

Giving a partial fillip to the e-commerce sector, the government on Tuesday permitted 100% foreign direct investment (FDI) under the automatic route for retail trading, in the marketplace model of e-commerce.

However, FDI is not permitted in the inventory-based model of e-commerce.

The notification, which is expected to redefine a section of the online retail industry in the country, was long awaited by e-commerce firms – both Indian companies such as Flipkart and Snapdeal, and subsidiaries of global giants such as Amazon India and Ebay, and several brick-and-mortar companies that use the marketplace model.

Marketplace model of e-commerce has been defined as providing an 'information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller'.

A press note issued by the Department of Industrial Policy and Promotion (DIPP) said that e-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services.

However, such entities will not exercise ownership over the inventory. 'Such an ownership over the inventory will render the business into inventory based model'.

As per the norms, an e-commerce firm will not be permitted to sell more than 25% of total sales from one vendor or its group companies.

The DIPP note also clearly states that an e-commerce entity will not own the inventory that is being sold on the platform.

Welcoming DIPP's guidelines, Nasscom said this is a clear indication that the government identifies marketplaces as an electronic intermediary, operating a technology platform to facilitate sales and transactions between independent third-party sellers and buyers. Nasscom added that it is extremely glad to see the reiteration of FDI policy 'as is' on the services sector, and also on sale of services through e-commerce.

Add-on services like order fulfillment services that are offered to independent third-party sellers on the platform can also be offered such entities. This will also help in ending certain misinterpretations and confusions occurring in the domain. It is also heartening to note that the government has clarified that the responsibility for products sold will rest solely on the seller, thereby clarifying the intermediary status of such marketplaces.

"However, we believe that restricting sales of a vendor to only 25% of the sales in the marketplace may prove to be restrictive, more so if the vendor sells high value items. The industry might face difficulties in case of sale of electronic items, where a vendor maybe offering exclusive access to certain items or discounts. Marketplaces have no control on how a product is priced and only organise 'sales' where vendors participate.

"This offers consumers with a variety of choices and also attractive prices, we hope that such consumer-friendly practices similar to 'sales' being offered by retailers will not be restricted. We firmly believe that these guidelines will strengthen e-commerce's growth in the country and iron out issues that have been hampering the industry in the past," said Nasscom.

The general consensus among industry experts is that the stipulations outlined are likely to rejig business models of some of the players in the country to conform to the new rules.

Amarjeet Singh, partner – tax, KPMG in India, said while the government has come with much needed clarification on foreign investment in e-commerce some of the structures practiced by existing players may require alteration. "But it will give much needed clarity to undertake business with certainty in longer term. Needless to add, this will further facilitate foreign investment in this sector," said Singh.

At present, 100% FDI is permitted in B2B (business-to-business) transactions under the automatic route.

E-commerce firms as well as industry analysts believe that the norms would provide clarity to India's fast growing e-commerce industry.

Paresh Parekh, tax partner - retail & consumer products, EY, said this is a landmark announcement and is likely to unleash further momentum in an already growing e commerce market. "I expect few more global e-commerce players now finalising their India entry plans. There were a lot of concerns on FDI which have now been addressed. However, certain new conditions introduced regarding limit on single vendor sales through marketplace, etc could impact certain existing marketplace e-commerce models," said Parekh.

Snapdeal said these guidelines recognise the transformative role that e-commerce marketplaces will play in the Indian market. "It is a comprehensive announcement which will pave the way for accelerated growth of the sector in India," it said.

Its chief executive Kunal Bahl welcomed the government's move in a tweet. "Great to see the guidelines around 100% FDI in e-commerce marketplaces. Glad the government recognises and supports an industry transforming India!" he tweeted.

Vivek Gupta, Partner, BMR Advisors, said an explicit position from the government has been long overdue. "The fact that this position has been stated after close to $10 billion have been committed to the sector, networks and businesses worth multiples of that in different business structures already exist on the ground and legal challenges and ED enquiries are in various stages, meant that the government had very little elbow room to really state a policy position. And hence, it has chosen to bless the market place model with some safeguards that the market place should not act like the retailer," said Gupta.