Our lives have been changed bye-commerce with the e-commerce market witnessing consistent growth in last many years all over the world including India. Not only big market players like Amazon and Flipkart but also small companies involved in e-commerce are also thriving and growing.
With the ever growing scale of e-commerce business in India, the government is also striving for developing a comprehensive legal framework to govern and streamline it. Foreign investment in e-commerce is governed by Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, as amended and FDI (Foreign Direct Investment) Policy (and the Press Notes) issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (DIPP).
‘E-commerce’ has been defined to mean buying and selling of goods and services including digital products over digital and electronic network. Primarily, two models of e-commerce are recognised – ‘inventory based’ and ‘market-place’.
The E-Commerce Platform
Inventory based model of e-commerce means an activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly. The marketplace model provides an information technology platform on a digital & electronic network to act as a facilitator between buyer and seller. Digital & electronic network includes network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc.
FDI is not permitted in the inventory based model of e-commerce. In the market based model of e-commerce, 100 percent FDI under automatic route is allowed, subject to the fulfilment of the prescribed conditions. Subject to the provisions of the FDI Policy, the e-commerce entities are allowed to only engage in B2B e-commerce and not B2C e-commerce activities.
As FDI is allowed only in B2B e-commerce, it was provided in Press Note 3/2016 that, an e-commerce entity providing marketplace will not, directly or indirectly, influence the sale price of goods or services, which also renders such business as an inventory based model. The said Press Note however also provided that FDI would be permitted in B2C segment, in certain cases inter alia including as manufacturer being able to sell its products manufactured in India and by a single brand retail trading entity operating through brick and mortar stores. However, the government continued to receive complaints that certain marketplace platforms were violating the policy by influencing the price of products and indirectly engaging in inventory based model.
An e-commerce platform operating an inventory based model does not only violate the FDI policy on e-commerce but also circumvents the FDI policy restrictions on multi-brand retail trading.
Going by the Law
On December 26, 2018, the DIPP issued a Press Note 2 (2018 Series) modifying the policy on foreign direct investment in e-commerce. Prior to the said Press Note there was a restriction on an e-commerce entity to permit more than 25 percent of the sales value on financial year basis through its marketplace from one vendor or their group companies and an e-commerce entity providing a ‘marketplace’ was not allowed to exercise ownership over the inventory.
It was being observed that many of the e-commerce entities in India created complex corporate structures to get around these requirements. For instance, when the DIPP restricted large sellers on e-commerce platforms from contributing more than 25 percent of sales, the online retailers set up complex structures to get around the legal loopholes.
Press note 2 of 2018 Series sought to address these issues. It inter alia provided that inventory of a vendor will be deemed to be controlled by an e-commerce entity if more than 25 percent of purchases of such vendor are from the marketplace entity or its group companies. It also prohibits any entity having equity participation by e-commerce marketplace or its group companies or having control on its inventory by e-commerce marketplace entity to group companies, to sell its products on platform run by such marketplace entity.
The Government has been maintaining a strict stance about adherence of FDI norms by the e-commerce entities so as to secure the interests of small players in the market.
The government has also now conveyed its intention to put in place a national e-commerce policy within 12 months to facilitate achieving holistic growth of the e-commerce sector. The Government had come up with a draft national e-commerce policy in February 2019 which proposed setting up a legal and technological framework for restrictions on cross-border data fl ow and also laid out conditions for businesses regarding collection or processing of sensitive data locally and storing it abroad. The draft policy however exempted certain categories of data from restrictions on cross-border data fl ow which included data not collected in India, B2B data shared between business entities under a commercial contract, data flows through software and cloud computing services (having no personal or community implications), data (excluding data generated by users in India from sources like e-commerce platforms, social media activities, search engines) shared internally by multinational companies.
The draft policy provided for integrating Customs, RBI and India Post systems to improve tracking of imports through e-commerce. The draft policy proposed to address the issues related to consumer protection, data protection and localisation, governance framework for various stakeholders, growth of MSMEs.
It emphasised on data and its localisation, firms getting 3 years to comply with local data storage requirements, restrictions on cross border flow of data including restrictions on sharing sensitive personal data with third parties even with the consent of the customers; start-ups and small firms proposed to be given ‘infant industry status’, initiative to eliminate fees applicable for claiming export benefits, replacing Bank Realisation Certificate (BRC) charges with Export Data Processing and Monitoring System (EPDMS) access to reduce cost of exports; discouraging capital dumping, restricting access to non-compliant apps and websites, tracking suspicious activities; increase in existing cap for courier exports; putting legal metrology obligations on market places, putting in place stricter grievance re-dressal systems through constituting e-consumer courts, mandating seller details on websites; putting obligations on intermediaries to create systems to identify and prevent dissemination of pirated content etc.
Concerns & Challenges
There have been concerns being raised by various stakeholders and discussions between the government and the industry players. The data localisation norms are now proposed to be kept out of the proposed e-commerce policy and is now proposed be handled by the nodal ministry of electronics and information technology, which is working on a data protection bill. It is also being maintained that the policy will be prospective, and nothing will be implemented with retrospective effect.
Further, it is also being contemplated that to ensure e-commerce companies are not indulging in predatory pricing, online marketplaces may soon have to disclose the source of as part of the pricing details of a product as well as the maximum discount that can be given on a product may also be limited, as part of the proposed e-commerce policy.
While there are ongoing discussions, it will however still be sometime before the policy is actually put in place and the possibility of further changes in the current proposed framework of the policy cannot be ruled out. It would be interesting to see how the policy is shaped when it is finally out. The Government is also maintaining that there would be no changes in the foreign direct investment norms in the sector.