11 April, 2016
On 29 March 2016, the Department of Industrial Policy & Promotion issued Press Note No. 3 (Press Note 3) in relation to foreign direct investment in the e-commerce sector in India. Accordingly, 100% foreign direct investment is permitted into e-commerce marketplaces, subject to a number of potentially significant conditions. Foreign direct investment into other e-commerce areas remains prohibited or restricted. It continues a trend of liberalisation in the telecoms and broadcasting sectors, amongst others, in India.
1. Background
The Consolidated FDI Policy Circular 2015 (as amended) of the Department of Industrial Policy and Promotion (FDI Policy) provides two routes for foreign direct investment (FDI) entry, the Automatic Route and the Government/Foreign Investment Promotion Board (FIPB) Route.
The Automatic Route means that approval from the Government will not be required for foreign investment. In contrast, the Government/FIPB Route requires the foreign investor to obtain prior approval from the Government, with such applications being considered by the FIPB under the Ministry of Finance.
Prior to Press Note 3, the FDI Policy restricted FDI in e-commerce to the following:
- Business to business e-commerce activities (100% FDI equity participation is permitted via the Automatic Route), i.e. not retail trading, implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.
- A manufacturer selling its products manufactured in India through wholesale or retail, including through e-commerce without Government approval.
- An Indian manufacturer selling its own branded products in any manner i.e. wholesale, retail, including through e-commerce platforms.
- A single brand retail trading entity operating through brick and mortar stores undertaking retail trading through e-commerce.
No other FDI was permitted in business to consumer e-commerce.
2. 100% FDI in e-commerce marketplaces
Press Note 3 provides that 100% FDI is permitted in relation to the marketplace based model of e-commerce (via the Automatic Route). FDI is not permitted in relation to the inventory based model of e-commerce.
The marketplace based model of e-commerce is 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.
The inventory based model of e-commerce is defined as e-commerce activity where the inventory of goods or services is owned by the e-commerce entity and is sold to consumers directly.
The distinction also features in other parts of Asia, for example in Indonesia where web portal businesses are 100% open to foreign investors but reselling via e-commerce is 100% closed to foreign investment (although the Negative List in Indonesia is currently under review).
In China, 100% foreign investment is permitted in limited online data processing and transaction processing services e-commerce activities, although in practice no licenses have yet been granted. Foreign investment in broader e-commerce is restricted to 50%, but again only a small handful of such companies have been approved. Companies with foreign investment that sell their own products on the internet do not require such a license and there is no specific foreign ownership cap.
3. Conditions for e-commerce marketplaces
Under Press Note 3, e-commerce marketplaces must enter into transactions with sellers registered on the platform on a business to business basis.
The name, address and other contact details of the seller of the goods and services must be provided. Delivery of goods and customer satisfaction, including warranty and guarantee of goods and services sold, must be the seller's responsibility.
E-commerce marketplaces cannot exercise ownership over the inventory, but may provide support services to sellers in areas such as payment collection, order fulfilment, logistics, warehousing and call centres.
Payments for sales may be facilitated by the e-commerce entity in accordance with Reserve Bank of India requirements.
E-commerce marketplaces also cannot influence the price of goods and services, directly or indirectly, and must maintain a level playing field.
Significantly, no more that 25% of sales affected through an e-commerce marketplace can be from one vendor or its group companies. It is understood that the restriction will apply even where the vendor is in fact the e-commerce marketplace or a group company, which is the case for a number of e-commerce companies.
4. Continuing liberalisation trend
Press Note 3 reflects a trend of liberalisation of FDI policies in India in the technology, media and telecoms sectors and more generally.
The DIPP released a press note on 22 August 2013 which had the effect of relaxing foreign investment limits in the telecoms sector.
On 10 November 2015, further liberalisation occurred in the broadcasting sector in India when FDI limits on several categories were revised upwards. The current position is as follows:
- For teleports, direct to home, cable networks, mobile TV, headend-in-the sky broadcasting service, 100% FDI is permitted (via the Automatic Route up to 49% and the Government/FIPB Route beyond 49%).
- For terrestrial broadcasting FM, 49% FDI is permitted (via the Government/FIPB Route).
- For up-linking of ‘news & current affairs’ TV channels, 49% FDI is permitted (via the Government/FIPB Route).
- For up-linking a non-'news & current affairs' TV channels/down-linking of TV channels, 100% FDI is permitted (via the Automatic Route).
- For publishing of newspaper and periodicals dealing with news and current affairs, 26% FDI is permitted (via the Government/FIPB Route).
- For publication of Indian editions of foreign magazines dealing with news and current affairs, 26% FDI is permitted (via the Government/FIPB Route).
- For publishing/printing of scientific and technical magazines/specialty journals/periodicals, 100% FDI is permitted (via the Government/FIPB Route).
- For publication of facsimile edition of foreign newspapers, 100% FDI is permitted (via the Government/FIPB Route).
For further information, please contact:
Mark Robinson, Partner, Herbert Smith Freehills
mark.robinson@hsf.com
