India – Department Of Industrial Policy And Promotion Press Note No. 2 (2018) Regarding FDI In E-commerce

8 January, 2019

 

The Department of Industrial Policy and Promotion (DIPP) released a press note on December 26, 2018 (PN 2/2018), bringing into place some conditions related to e-commerce activities of entities which have FDI. PN 2/2018 will be effective from February 1, 2019.

 

The 2017 FDI policy prohibited the e-commerce entity from having more than 25% of sales value from the marketplace on financial year basis from one vendor or their group companies. This was undertaken with the intention of distributing the sales value of the e-commerce entity amongst many vendors and ensuring that sales are not predominantly concentrated in an entity controlled by the e-commerce marketplace. This was set as the criteria to ensure that the model does not become an ‘inventory’ based model, which was not permitted.  

 

However, PN 2/2018 shifted the 25% restriction from the e-commerce entity to the vendor. It states that if more than 25% of purchases of a vendor are from the marketplace entity or any of its group companies, inventory of the vendor shall be deemed to be controlled by the e-commerce marketplace entity, and this would turn the business into an inventory based model, which is not allowed. It also expressly prohibits a marketplace from mandatorily requiring a vendor to exclusively sell products on its platform.

 

These restrictions may impact several exclusive sales tie-ups with specific brands, and even for new product launches exclusively on a particular marketplace. Also, the e-commerce entity will be required to demonstrate that a vendor has less than 25% of its total sales on that platform. The requirement increases data collection requirements for the e-commerce operator as it requires it to obtain total sales information of each vendor.

 

PN 2/2018 also provides that where the e-commerce marketplace entity or its group companies has / have an equity stake in an entity or exercises control over such entity, such entity will not be permitted to sell its products on the platform run by such marketplace entity. Further, an entity cannot sell its products on an e-commerce platform if its inventory is controlled by that e-commerce entity.

 

The third change in the FDI policy requires the ecommerce marketplace entity to provide other services such as logistics, warehousing, etc. on a fair and non-discriminatory basis. Thus, preferential treatment for one or more sellers will no longer be feasible. The provision clarifies that provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed to be unfair and discriminatory.

 

Further, cash backs provided by the group companies of the e-commerce entity must be fair and non-discriminatory i.e. other vendors must be permitted to provide similar terms. As per PN 2/2018, guarantees, warranties and after-sales services are to be provided by sellers. Payments can be facilitated by the e-commerce entity only in accordance with methods and guidelines of the Reserve Bank of India (RBI). The e-commerce marketplace entity will be required to furnish a report of compliance to the RBI annually by September 30 of each year, for the previous financial year.

 

Potential Impact: In addition to the impact as set out above, these modifications (a) could result in limiting the deep discounts provided by large e-commerce companies, (b) prohibit exclusive arrangements with a particular market place, (c) will result in e-commerce market place entities disposing their equity participation in selling entities.