The beginnings of FDI in e-commerce
The first major FDI policy decision affecting e-commerce came through the sector specific guidelines for FDI contained in Press Note No. 2 (2000 series),[1] released by the erstwhile Department of Industrial Policy and Promotion (“DIPP”), now referred to as the Department for Promotion of Industry and Internal Trade (“DPIIT”). The notification allowed 100% FDI in business-to-business (“B2B”) e-commerce activities (buying and selling of products and services by businesses through an online portal), provided that the company receiving the investment divested 26% of their equity to the Indian public within 5 years of the investment, if the company making the investment was listed in other parts of the world.[2] This invited forceful protests by nationalist bodies like the Swadeshi Jagran Manch which demanded rolling back the decision in ‘national interest’.[3] On the contrary, associations like the National Association of Software and Services Companies (“NASSCOM”) hailed the government’s decision. Simultaneously, they also called for allowing 100% FDI in business-to-consumer (“B2C”) e-commerce (sale of products and services from businesses to individuals through an online portal).[4] However, the government’s stance on forbidding FDI in B2C e-commerce has not changed and has only been reiterated over the years.
By the end of 2005, a number of companies had approached the Foreign Investment Promotion Board (“FIPB”) voicing difficulties in complying with the divestment requirement and sought exemption from it.[5] Subsequently, the government removed the 26% foreign equity divestment requirement through Press Note 4 of the 2006 series.[6]
In 2010, the DIPP released a consolidated FDI policy[7] where it defined e-commerce as “buying and selling by a company through the e-commerce platform”.
The evolution of FDI in retail e-commerce
In 2012, the DIPP stated that retail trading through e-commerce platforms i.e. B2C e-commerce was barred for companies with FDI, regardless of whether they were engaged in multi-brand retail trading (“MBRT”) or single brand retail trading (“SBRT”).[8] This was contrary to industry expectations since the government had only recently increased the permitted level of FDI through the government route in single brand (to 100%) and multi brand (51%) product retailing through brick-and-mortar stores.[9] Several rounds of discussion with groups like NASSCOM and the Retailers Association of India (“RAI”) took place during 2012 and 2015 in which the NASSCOM openly supported the idea of allowing FDI in B2C e-commerce, subject to some local sourcing conditions.[10] The RAI also supported it, albeit only in non-food products. The RAI hailed B2C e-commerce as a means to empower consumers and retailers in tier II and tier III cities.[11] A large number of stakeholders and jurists also supported it[12]
A DIPP discussion paper released in 2014 reiterated the government’s reluctance to allowing FDI in B2C e-commerce.[13] In a 2015 meeting between Nirmala Sitharaman, then minister of state for commerce and industry and representatives from Snapdeal, Flipkart, the Federation of Indian Chambers of Commerce and Industry (“FICCI”) and the Confederation of Indian Industry (“CII”), the minister stated that FDI in B2C e-commerce would flood markets with imported goods, which would be unfair to small retailers and would slow down the ‘Make in India’ campaign.[14]
However, in 2015, the DIPP released Press Note 12 of the 2015 series, in which it permitted FDI in e-commerce for SBRT entities, which operated through physical stores in India.[15] According to this press note, Indian manufacturers could sell their own single brand products online, provided that they manufactured 70% of the total value of the product in-house and sourced 30% of the goods’ value from Indian enterprises.[16] However, the government steered clear of allowing FDI in multi-brand retail through e-commerce platforms.
Press Note 3, 2016 series:
By 2016, the Indian e-commerce industry had grown large, but it was full of complex structures established to get around the restrictions of the existing FDI policies.[17] E-commerce platforms like Amazon and Flipkart with large foreign investments, employed novel means like promotional funding, cashbacks and other methods to slash their prices and attract consumers.[18] Moreover, though entities like Amazon and Flipkart portrayed themselves as following a ‘marketplace model’, they derived a major portion of their sales from their group companies, Cloudtail India Pvt. Ltd. and WS Retail Services Pvt. Ltd., respectively. In a marketplace model, the entity only acts as a facilitator between consumers and sellers, and does not act as a seller itself. However, companies like Amazon were following the ‘inventory model’ under the garb of following the ‘marketplace model’ i.e. they were engaging in multi-brand product retail through their own group companies on their own platform. This was viewed as a violation of the FDI policy in India, which did not allow FDI in e-commerce for multi-brand retail trading.[19] Many e-commerce companies used similar complex business structures to circumvent the FDI restrictions on B2C e-commerce[20].
The RAI filed a petition before the Delhi High Court against deep discounting and similar practices of e-commerce platforms which de facto violated FDI norms.[21] The petition was one of the many factors which pushed the government to define terms like e-commerce, online marketplace and clarify its position on FDI in e-commerce in 2016.[22]
Recognising these evasive methods being followed to circumvent the existing FDI policy on e-commerce, the government introduced significant changes through Press Note 3 of the 2016 series.[23] It expanded the definition of e-commerce to include “buying and selling of goods and services including digital products over digital and electronic networks.”[24] It also defined, and distinguished between the ‘inventory based model’ and ‘marketplace model’ of e-commerce.
Under the new regulations, e-commerce entities were allowed to provide support services to sellers, but were barred from exercising ownership over the inventory or influencing sale prices of goods and services.[25] Moreover, specific guidelines restricting e-commerce platforms from influencing sale prices or from deriving more than 25% sales from a single seller were put in place.[26]
The new conditions were considered a boon for traditional retailers as they hoped that it would lead to parity in the market. NASSCOM termed the new regulations as a game changer, and praised the government for putting an end to misinterpretations and for reiterating FDI policy ‘as is’ for the service sector.[27] However, it refrained from making any references to the discounting clause. It also observed that the provision restricting procurement from a single vendor to 25% of sales may prove to be counterproductive, in case the vendor is a seller of high value goods like electronics.[28] It was also noted that such restrictions were not imposed on other domestic e-commerce companies like Reliance.[29] From the standpoint of consumers, it also indicated an end to deep discounts and lower prices from e-commerce companies receiving FDI.
The co-convenor of Swadeshi Jagran Manch, Mr. Ashwani Mahajan, criticised the move of allowing 100% FDI in e-commerce for the marketplace model, calling it a reward for prior illegal behaviour of e-commerce companies. He also said that small shopkeepers would be badly affected by the ‘predatory pricing’ policy adopted by such companies.[30] The Confederation of All Indian Traders (“CAIT”) also protested against the move, warning that global retailers would soon sidestep restrictions on multi-brand retail trading.[31]
Press Note 2, 2018 series and its aftermath
Despite the government’s attempts to regulate practices in the e-commerce sector through Press Note 3 of the 2016 series, complaints about deep discounts and other similar practices by e-commerce companies continued.[32] E-commerce companies like Amazon and Flipkart were also accused of violating the FDI policy through their complicated seller structure that allowed them to exercise some level of control over the inventory they sold.[33] The CAIT called India an ‘e-commerce dumping ground’, disrupting the livelihood of thousands of people in the country.[34]
In the Press Note 2 of the 2018 series,[35] the DPIIT introduced some changes to the FDI policy in the e-commerce sector. These changes are in line with the government’s attempt to balance its twin objectives of protecting small traders and encouraging foreign investments in India.[36] Press Note 2 of the 2018 series stated that an e-commerce entity would be deemed to adopt the inventory based model if it exercises control or ownership over the inventory.[37] This would be deemed to be the case if more than 25% of the sales of such vendors are to the e-commerce entity or its group companies. The notification also barred e-commerce entities from selling goods of any vendor in which it or its group companies had an equity stake. It also prohibited e-commerce entities from requiring merchants to sell goods exclusively on their platform.[38] Some e-commerce companies like Amazon, Walmart had pushed for an extension to fully implement the policies, which was refused by the government.[39] The Swadeshi Jagran Manch appreciated the new norms and saw it as the government’s attempt to shut down ‘predatory behaviour’ of e-commerce entities with FDI.[40] On the contrary, NASSCOM called them a ‘significant policy change’ which was taken without any proper consultation.[41] It also expressed its displeasure over the FDI policy trying to interfere with issues relating to competition and consumer protection.
E-commerce entities like Amazon and Flipkart were badly hit by the changes. Many e-commerce companies had developed their private labels and had exclusive partnerships with companies (especially for smartphones) to attract more consumers and to generate higher profits through such deals.[42] However, with the new amendments in the FDI policy, all such practices became illegal. Walmart reportedly called India’s new rules on FDI in e-commerce as ‘a regressive policy shift’ that ‘discriminated against foreign firms’.[43] Some stakeholders commented that the new norms favoured large domestic business like Reliance that are engaged in e-commerce and have the capital to build inventories, and would negatively impact start-ups and entrepreneurs by reducing the infusion of foreign funds.[44]
The government in its clarificatory notification of 04 January 2019,[45] reasoned that rules under Press Note 2 of the 2018 series were necessary to ensure that e-commerce entities did not circumvent rules and to ensure proper implementation of the policy.[46] However, the new notification may lead to short-term unemployment in the supply chain network (warehouse expansions, delivery executives) if it negatively impacts the growth of e-commerce entities.[47]
In light of these opinions, the government recently announced the constitution of a new Committee on 12 July 2019 under the DPIIT to examine issues related to FDI in the e-commerce sector, and provide suggestions.[48] The report of the committee is awaited.
Recent changes for FDI in e-commerce for single-brand retail trading:
The union cabinet approved a proposal[49] on 28 August 2019 to relax FDI norms for SBRT entities to commence e-commerce activities before setting up a physical store. However, they have to set up their physical store within two years of commencing online retail. Previously, SBRT entities had to set up a physical store before being allowed to undertake e-commerce activities. This created an artificial restriction and seemed to be out of sync with current market practices. The revised rules are expected to drive jobs, digital payments, customer care services, training and product skilling.
(Authored by Gayathri Gupta, NALSAR, Hyderabad during her internship at Ikigai Law with inputs from Arpit Gupta, Associate at Ikigai Law)
Tags: FDI. E-commerce, India, DPIIT, Commerce, Industry, Retail, Trading, B2B e-commerce, B2C e-commerce.
Category: Other areas
[1] Department of Industrial Policy & Promotion, Press Note No. 2 (2000 Series), Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/pn23_0.pdf.
[2] Department of Industrial Policy & Promotion, Press Note No. 2 (2000 Series), Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/pn23_0.pdf.
[3] Special Correspondent, SJM wants decision on FDI reversed, The Hindu, June 17, 2000. Available at: https://www.thehindu.com/todays-paper/tp-miscellaneous/tp-others/sjm-wants-decisions-on-fdi-reversed/article28027553.ece.
[4] Staff Correspondent, Nasscom’s action plan for boosting e-commerce, The Hindu, July 28, 2000. Available at: https://www.thehindu.com/todays-paper/tp-miscellaneous/tp-others/nasscoms-action-plan-for-boosting-e-commerce/article28034973.ece.
[5] Gaurav Malani, FDI in B2B e-comm, petro marketing, tea to get a boost, Economic Times, Nov. 14, 2005. Available at:https://economictimes.indiatimes.com/fdi-in-b2b-e-comm-petro-marketing-tea-to-get-a-boost/articleshow/1294024.cms.
[6] Department of Industrial Policy & Promotion, Press Note No. 4 (2006 Series), Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/pn4_2006_0.pdf.
[7] Department of Industrial Policy & Promotion, Consolidated FDI Policy 2010, Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/FDI_Circular_02of2010%20%206_0.pdf.
[8] Department of Industrial Policy & Promotion, Press Note No. 4 (2012 Series), Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/pn4_2012_2.pdf; Department of Industrial Policy & Promotion, Press Note No. 5 (2012 Series), Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/pn5_2012_2.pdf.
[9] Retail team, India notifies 51% FDI in multi brand retail trading, Nishith Desai Associates, September 12, 2015. Available at: http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/india-notifies-51-fdi-in-multi-brand-retail-trading.html?no_cache=1&cHash=774283e9a27855b2597d5309df6cccea.
[10] PTI, FDI in e-commerce: Nasscom for mandatory local sourcing, Business Standard, October 13, 2013. Available at: https://www.business-standard.com/article/economy-policy/fdi-in-e-commerce-nasscom-for-mandatory-local-sourcing-113103100927_1.html.
[11] Retailers Association of India, Feedback on the discussion paper by DIPP- Indian E-commerce industry, January 28, 2014. Available at: https://www.rai.net.in/images/advocacy/51508376_Feedback_on_DIPP.pdf.
[12] PSA, India: FDI in B2C E-Retail, Mondaq, July 4, 2014. Available at: http://www.mondaq.com/india/x/325224/international+trade+investment/FDI+in+B2C+eretail.
[13] Department of Industrial Policy & Promotion, Discussion Paper on E-commerce in India, September 2014. Available at: https://dipp.gov.in/sites/default/files/Discussion_paper_ecommerce_07012014%20%20%2013.pdf.
[14] Nayanima Basu, Government turns down FDI in retail e-commerce, Business Standard, July 10, 2015. Available at: https://www.business-standard.com/article/economy-policy/govt-turns-down-fdi-in-retail-e-commerce-115061000053_1.html.
[15] Department of Industrial Policy & Promotion, Press Note No. 12 (2015 Series), Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/pn12_2015%20%281%29.pdf.
[16] Department of Industrial Policy & Promotion, Press Note No. 12 (2015 Series), Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/pn12_2015%20%281%29.pdf.
[17] Rahul Matthan, Time to redo FDI in e-commerce in India, Live Mint, January 16, 2019. Available at: https://www.livemint.com/Opinion/cO0CvCKOwrxUe8usL1QrQO/Opinion–Time-to-redo-FDI-in-ecommerce-in-India.html.
[18]Sean McLain and Shefali Anand, India’s e-commerce startups throw caution to the wind, The Wall Street Journal, 11 Dec. 2015, https://www.wsj.com/articles/indias-e-commerce-startups-throw-caution-to-the-wind-1449867619.
[19] Mihir Dalal & Shrutika Verma, Amazon’s stake in seller may come under scrutiny, Livemint, 06 Oct. 2014, https://
www.livemint.com/Companies/5rcMyyEJgbQzZUnkJ9dRjJ/Amazon-stake-in-seller-may-come-under-scrutiny.html
[20] FDI Escapades, Businessworld, 08 Nov. 2014, http://www.businessworld.in/article/FDI-Escapades/08-11-2014-67048/.
[21] Retailers Association of India, Action taken as per members request to seek parity between Brick-and-Mortar and E-commerce businesses, June 30, 2015. Available at: https://www.rai.net.in/advocacy/updates/276-action-taken-as-per-members.
[22] Priyanka Mittal & Sapna Agarwal, Govt. faces more questions on FDI in e-commerce, LiveMint, December 2, 2015. Available at: https://www.livemint.com/Politics/lPrE8sCkWZ0y4d7OrcJMEL/Govt-faces-more-questions-on-FDI-in-ecommerce.html.
[23] Department of Industrial Policy & Promotion, Press Note No. 3 (2016 Series), Ministry of Commerce & Industry. Available at: https://dipp.gov.in/sites/default/files/pn3_2016_0.pdf,
[24] Department of Industrial Policy & Promotion, Press Note No. 3 (2016 Series), Ministry of Commerce & Industry. Available at:https://dipp.gov.in/sites/default/files/pn3_2016_0.pdf,
[25] Asit Ranjan Mishra, Mihir Dalal, Govt defines e-commerce marketplace rules, allows 100% FDI, Live Mint, January 30, 2016. Available at: https://www.livemint.com/Politics/hglep85yZOQzChj6KRrrCK/Govt-allows-100-FDI-in-ecommerce-marketplace-model.html.
[26] Swetha Prashant & Divya Sinha, FDI in e-commerce: everything you need to know, My Law Blog, May 17, 2016. Available at: http://blog.mylaw.net/fdi-in-e-commerce-everything-you-need-to-know/.
[27] NASSCOM, NASSCOM Welcomes Dipp’s Guidelines To Introduce 100% Fdi In E-Commerce. Available at: https://www.nasscom.in/press/nasscom-welcomes-dipp%E2%80%99s-guidelines-introduce-100-fdi-e-commerce.
[28] Team, India formalises 100% FDI in e-commerce marketplace with riders, VCCircle, March 30, 2016. Available at: https://www.vccircle.com/india-formally-allows-fdi-e-commerce-marketplace-stumps-clause.
[29]Swetha Prashant &Divya Sinha, FDI in e-commerce: everything you need to know, My Law Blog, May 17, 2016. Available at: http://blog.mylaw.net/fdi-in-e-commerce-everything-you-need-to-know/.
[30] PTI, RSS-affiliate Swadeshi Jagran Manch to oppose FDI in ecommerce, food processing, The Hindu, May 8, 2016. Available at: https://www.thehindu.com/news/national/RSS-affiliate-Swadeshi-Jagran-Manch-to-oppose-FDI-in-ecommerce-food-processing/article14308315.ece.
[31] ET Bureau, Government permits 100% FDI in e-commerce market place, but with riders, Economic Times, March 30, 2016. Available at: https://economictimes.indiatimes.com/news/economy/policy/government-permits-100-fdi-in-e-commerce-market-places-but-with-riders/articleshow/51600780.cms.
[32] Varsha Bansal &, Gireesh Chandra Prasad, What new FDI guidelines mean for the e-commerce ecosystem, Live Mint, 31 December 2018. Available at:
[33] What are India’s new foreign direct investment rules for e-commerce, LiveMint, Jan. 31, 2019. Available at: https://www.livemint.com/politics/policy/what-are-india-s-new-foreign-direct-investment-rules-for-e-commerce-1548945138551.html.
[34] Xonfederation of All India Traders, FDI in E-commerce. Available at: http://www.cait.in/causes/fdi-in-e-commerce.
[35] Department of Industrial Policy & Promotion, Press Note No. 2 (2018 Series), Ministry of Commerce & Industry. Available at: http://pib.nic.in/newsite/PrintRelease.aspx?relid=186804.
[36] Seema Jhingan, India: Changing Landscape of the E-commerce sector vis-a-vis the FDI policy, Mondaq, April 15, 2019. Available at: http://www.mondaq.com/india/x/798970/Inward+Foreign+Investment/Changing+Landscape+Of+The+ECommerce+Sector+visvis+The+FDI+Policy.
[37] Department of Industrial Policy & Promotion, Press Note No. 2 (2018 Series), Ministry of Commerce & Industry. Available at: http://pib.nic.in/newsite/PrintRelease.aspx?relid=186804.
[38] Department of Industrial Policy & Promotion, Press Note No. 2 (2018 Series), Ministry of Commerce & Industry. Available at: http://pib.nic.in/newsite/PrintRelease.aspx?relid=186804.
[39] Kirtika Suneja, E-commerce policy to have new FDI norms, The Economic Times, Feb. 4, 2019. Available at: https://economictimes.indiatimes.com/industry/services/retail/e-commerce-policy-to-have-new-fdi-norms/articleshow/67825661.cms.
[40] Vasudha Venugopal, Swadeshi Jagran Manch welcomes govt’s curbs on predatory behaviour of e-comm giants, ETtech.com, Dec. 28, 2018. Available at: https://tech.economictimes.indiatimes.com/news/corporate/swadeshi-jagran-manch-welcomes-govts-curbs-on-predatory-behaviour-of-e-comm-giants/67280609.
[41] NASSCOM, Annual Report 2018-19. Available at: https://www.nasscom.in/sites/default/files/NASSCOM_Annual_Report_2018-19.pdf.
[42] Varsha Bansal & Gireesh Prasad, What new FDI guidelines mean for the e-commerce ecosystem, LiveMint, Dec. 31, 2018. Available at: https://www.livemint.com/Companies/5t08JnDkEBZw9mXU1Pwd3I/What-new-FDI-guidelines-mean-for-the-ecommerce-ecosystem.html.
[43] Aditya Klara, Exclusive: Walmart told U.S. government India e-commerce rules regressive, warned of trade impact, Reuters, July 11, 2019. Available at: https://in.reuters.com/article/walmart-india/exclusive-walmart-told-u-s-government-indias-e-commerce-rules-regressive-warned-of-trade-impact-idINKCN1U61ZW.
[44] Sandeep Soni, Revised e-commerce FDI policy favours likes of Ambani, Biyani, Birla, says VC funds, Financial Express, Jan. 29, 2019. Available at: https://www.financialexpress.com/industry/sme/revised-e-commerce-fdi-policy-favours-likes-of-ambani-biyani-birla-says-vc-funds/1458648/.
[45] Department of Industrial Policy & Promotion, DIPP Clarification regarding Press Note No. 2 (2018 Series), Ministry of Commerce & Industry. Available at: http://pib.nic.in/newsite/PrintRelease.aspx?relid=187156.
[46] Department of Industrial Policy & Promotion, DIPP Clarification regarding Press Note No. 2 (2018 Series), Ministry of Commerce & Industry. Available at: http://pib.nic.in/newsite/PrintRelease.aspx?relid=187156.
[47] Varsha Bansal, Tighter e-commerce norms may lead to short-term job losses, LiveMint, Dec. 29, 2018. Available at: https://www.livemint.com/Industry/q54YTKvURsxZOEQx61O8uO/Tighter-ecommerce-normsmay-lead-to-shortterm-job-losses.html.
[48] Committee constituted to examine issues related to FDI in e-commerce, Live Mint, 24 July 2019. Available at: https://www.livemint.com/politics/policy/committee-constituted-to-examine-issues-related-to-fdi-in-e-commerce-1563970583010.html.
[49] Ministry of Commerce and Industry, Cabinet approves proposal for review of FDI policy on various sectors, release ID: 1583295. Available at https://pib.gov.in/PressReleseDetail.aspx?PRID=1583295.
