The Government of India in the recent past has taken a slew of far-reaching measures to ease foreign investment in various sectors. Below, we discuss recent critical amendments relating to foreign investment in single-brand retail trade and e-commerce.FDI in single-brand retail trade
Present position
Under the foreign direct investment (FDI) policy, foreign investment in single-brand retail trade (SBRT) is permitted up to 100 percent, where investment up to 49 percent does not require approval from the Foreign Investment Promotion Board (FIPB) and investment beyond 49 percent requires FIPB approval subject to the satisfaction of the conditions as given in the FDI policy.
Amendment in SBRT sector
The Department of Industrial Policy and Promotion (DIPP) on June 24, 2016 vide press note 5 of 2016 series allowed:
- an SBRT entity operating through brick-and-mortar stores to undertake retail trading through e-commerce; and
- a waiver of the local sourcing norms for three years from the opening of the first store to entities undertaking SBRT in products having “state-of-the-art” and “cutting-edge” technology (which aspects shall be considered on a case-to-case basis by DIPP) and where local sourcing is not possible. Thereafter, sourcing norms given in the FDI policy would be applicable.
FDI in e-commerce
Foreign investment in e-commerce is permitted up to 100 percent through the automatic route in business-to-business (B2B) e-commerce (ie, marketplace model of e-commerce). FDI is permitted in business-to-consumer (B2C) e-commerce (ie, inventory model of e-commerce) only in the following circumstances:
- a manufacturer is permitted to sell its products manufactured in India through e-commerce;
- an SBRT entity operating through brick-and-mortar stores is permitted to under-take retail trading through e-commerce; and
- an Indian manufacturer (who must source 70 percent of its products in-house and 30 percent from Indian manufacturers) is permitted to sell its own single-brand products through e-commerce.
The DIPP released press note 3 of 2016 series dated March 29, 2016 setting out the following definitions and operating guidelines for FDI in the e-commerce sector, which has brought about radical changes.
Definitions
- The term ‘e-commerce’ has been redefined as buying and selling of both goods and services, including digital products over both digital as well as electronic network. The term ‘e-commerce entity’ includes Indian companies, foreign companies and offices, branches, or agencies owned and controlled by non-residents, which conduct e-commerce business. As a result of this definition, it is now clear that foreign companies can invest in ‘marketplace based’ B2B e-commerce.
- ‘Inventory based’ and ‘marketplace based’ model of e-commerce have been defined. Inventory based model means where inventory of goods and services is owned by the e-commerce entity and is sold to the consumers directly whereas marketplace based model means 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.
Operating guidelines for FDI in e-commerce
- E-commerce marketplace entities will be permitted to enter into transactions with sellers registered on its platform on a B2B basis but the e-commerce entity will not exercise any ownership over the inventory.
- E-commerce marketplace entities are permitted to provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services.
- An e-commerce entity cannot derive more than 25 percent of the sales on their platform from a single seller or any of its group companies.
- Goods/services made available on the website are to clearly provide the contact details of the seller.
- Payments for sale shall be facilitated by the e-commerce entity in conformity with Reserve Bank of India guidelines.
- E-commerce entities cannot ‘directly or indirectly influence the sale price of goods or services’ and are obligated to maintain a ‘level playing field’.
Conclusion
There are certain concerns (including policy matters) on which the FDI policy in respect of foreign investment in SBRT and e-commerce is silent. On the whole, easing norms for infusion of foreign investment have been encouraged by the industries, but certain policy changes are required for their successful operation.
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