[The following guest post is contributed by Arup Pereira, who is a Principal Associate at J. Sagar Associates, Mumbai]
The Government’s foreign direct investment (“FDI”) policy on retail trading in India encourages foreign companies and Indian companies with foreign investment to “Make in India”. At present, FDI is not permitted in an Indian company engaging in business to consumer (“B2C”) e-commerce, except in cases of a manufacturer selling its products manufactured in India, a single brand retail trading entity operating through brick and mortar stores or an Indian manufacturer selling its own single brand products manufactured in India. In the third instance, the exemption is subject to the conditions that the Indian manufacturer owns the brand under which at least 70% of the products are manufactured in-house and no more than 30% is sourced from other Indian manufacturers. The FDI policy prohibits companies with FDI from engaging in multi brand retail trading, in any form, by means of e-commerce.
In the recently issued Press Note 3 of 2016 regulating FDI in the e-commerce sector (“E-Commerce Guidelines”) the Government has sought to provide clarity on the policy framework for FDI in e-commerce. E-commerce has been defined to mean buying and selling of goods and services including digital products over digital and electronic networks. As per the E-Commerce Guidelines, 100% FDI is permitted in the marketplace model of e-commerce under the automatic route (i.e. no approval of the Government or the Reserve Bank of India is required for such foreign investment). However, FDI in the inventory based model of e-commerce is prohibited.
In a marketplace model of e-commerce, the e-commerce entity provides the technology platform on a digital or an electronic network to facilitate transactions between a buyer and a seller of products or services. In an inventory based model of e-commerce, the inventory of goods and services is owned by the e-commerce entity itself and is sold by the e-commerce entity directly to the consumers. The e-commerce entity could be either a company incorporated in India, a foreign company having a place of business (physical or electronic) in India directly or through an agent and conducting business activities in India, or an office, branch or agency in India which is owned or controlled by a non-resident.
One of the conditions imposed on the marketplace model of e-commerce under the E-Commerce Guidelines restricts an e-commerce entity from permitting more than 25% of the sales affected through its marketplace from one vendor or its group companies. Another condition prohibits an e-commerce entity from directly or indirectly influencing the sales price of goods or services sold through its market place and requires the e-commerce entity to maintain a level playing field. The sales limit restriction appears to apply not only to the group companies of vendors selling through the marketplace of the e-commerce entity but also to group companies of the e-commerce entity itself. It would also affect individuals, partnership firms and companies in India (not having any foreign investment) who may be vendors on the marketplace of the e-commerce entity.
It is unclear how the sales limit restriction imposed per vendor would boost the Government’s ‘Make in India’ policy. There does not appear to be any rational nexus between this restriction and the objectives underlying the Government’s FDI policy on retail trading in India, as explained above. The Indian Constitution guarantees its citizens and companies incorporated in India the fundamental right to carry on any occupation, trade or business, while permitting the Government to impose reasonable restrictions on this fundamental right in the interests of the general public. In the event the sales limit restriction is challenged before the Indian courts by vendors not having any foreign investment, on the ground that it interferes with their fundamental right to carry on business in India, it remains to be seen whether the Indian courts (in the exercise of their writ jurisdiction) would uphold such a restriction as being a reasonable restriction in the interests of the general public.
The sale limit restriction also presents certain operational challenges to e-commerce entities from a compliance perspective. Since this restriction would need to be applied on the basis of the aggregate sales within a particular reference period of all vendors registered with the e-commerce entity and the E-Commerce Guidelines do not specify such reference period (for example, whether monthly, quarterly or bi-annually), it would be difficult for an e-commerce entity to monitor and enforce this restriction on a real time basis. It would also result in an additional administrative compliance burden on the e-commerce entity. Even if the Government does stipulate such reference period, it may unfairly prejudice the economic interests of certain vendors. For example, a vendor who is restricted from selling further on the marketplace of the e-commerce entity on the ground that its sales have exceeded 25% of the aggregate sales of the e-commerce entity during the previous month or quarter, may not fall within the sales limit restriction per vendor on the basis of the aggregate annual sales of all vendors on the marketplace of the e-commerce entity during the entire financial year. Since the e-commerce entity is required to maintain a level playing field and is prevented from influencing the sale price of goods and services sold through its market place (whether by offering discounts or otherwise), this restriction is also susceptible to a challenge before the courts on the ground that it unreasonably restricts such vendors’ fundamental right to carry their business in India, as explained earlier.
The E-Commerce Guidelines also do not specify the manner in which an e-commerce entity is required to identify group companies of the vendors registered with it. However, the e-commerce entity can address this issue to an extent by obtaining from a vendor the requisite declarations (including information about its existing group entities) at the time of such vendor’s registration with the e-commerce entity. One of the conditions of registration should be an obligation on the vendor to promptly notify the e-commerce entity of any change in the information declared at the time of its registration, and breach of such obligation could result in cancellation of the vendor’s registration and termination of its ability to sell on the marketplace of the e-commerce entity. In such event, the Government may consider clarifying that the consequences of such breach would be faced by the vendor concerned and not the e-commerce entity.
The E-Commerce Guidelines were brought into effect immediately on the date of their issue. In keeping with the Government’s stated intent of improving the ease of doing business in India, it should clarify its position on the above ambiguities in the E-Commerce Guidelines at the earliest after obtaining feedback from all the stakeholders and also provide a reasonable time frame to enable existing e-commerce entities to comply with the same.
- Arup Pereira