1

Foreign Direct Investment in

India vis-à-vis E-Commerce
Sector.

-ARPIT GUPTA
HIDAYATULLAH NATIONAL LAW UNIVERSITY
 INTRODUCTION 2
o With the advent of easier internet accessibility and a huge
number of youth population India is set to become the second
largest e-commerce industry in the near future. The E-commerce
market is expected to reach US$ 200 billion by 2027 from US$ 38.5
billion in 2017.
o 100% FDI is permitted in business to business and marketplace
model of e-Commerce, whereas FDI in inventory model as well
as Business to Consumer model is prohibited.
o DPIIT (Earlier DIPP) along with RBI and SEBI regulate FDI Policies in
India under FEMA, 1999.
o The FDI Policy 2017 defines e-commerce as “E-commerce means
buying and selling of goods and services including digital
products over digital & electronic network.”
 3
o DIPP releases circulars and Regulations to amend or to clarify the
FDI policy.
o Last two Press Notes relating to e-Commerce were released in
2016 as Press Note 3 and in 2018 as Press Note 2.
o Various Changes were made by the 2018 Press Note 2.
o Recently, after the Press Note 2 of 2018 was released in
December, 2018, A Draft National Policy on E-commerce was
released in February 2019, which will effect the FDI in e-
commerce industry in numerous ways.
o There are still grey areas which need to be addressed for better
implementation of FDI Policy.
CHANGES BROUGHT IN BY PRESS NOTE 2 OF 2018 4
Need: The Clarification of PN 2 of 2018 stated that there were numerous
complaint stating that certain e-commerce marketplaces (with FDI)
were indirectly engaging in inventory based e-commerce and
influencing the price of Products.
On the basis of the statements of the government, the changes made
are not new but only clarification for better implementation of existing
regulations.
Changes brought in by the Press Note 2 of 2018 vis-à-vis Press Note 3 of
2016:
1. CONTROL OVER INVENTORY: FDI in e-commerce in India is permitted
only in marketplace model and not inventory based model. The e-
commerce entities cannot control the inventory. Respectively the word
‘control’ was introduced in the guidelines.
Continued.
The provision of 25% of sales from a single source proved to be 5
ineffective and thus in 2018, in an attempt to explain ‘control’, it was
stated that if 25% or more of the vendor’s purchases are from the market
place entity then the marketplace entity will deemed to have control,
and the same is prohibited.
However, confusion still persists.
2. EQUITY OWNERSHIP- Press Note 2 of 2018 states that "…an entity
having equity participation by an e-commerce marketplace entity or its
group companies… will not be permitted to sell its products on the
platform run by such marketplace entity".
This is an attempt to restrict equity holding of the marketplace entity. The
blanket prohibition does not clarify if indirect holding is also prohibited.
3. EXCLUSIVITY: Press Note 2 of 2018 provides that e-commerce
marketplace entity will not mandate any seller to sell any product
exclusively on its platform only.
Continued..
 6
This will impact the exclusive arrangement provision of anti-trust laws.
However, the guidelines for enforcing authorities would determine if a
seller has been ‘mandated’ to sell its products exclusively on an e-
commerce platform.
Some brands resort to exclusive supply due to less demand voluntarily.
This change might not be of great importance if an e-commerce
marketplace has an arms length relationship with its vendors.
4. CERTIFICATE OF COMPLIANCE: Press Note 2 of 2018 requires an e-
commerce entity to furnish a certificate annually, confirming
compliance with these guidelines. Since some of the compliances
relate to vendors, it is unclear as to how the e-commerce entities will
be able to provide this certification. Would they be required to
perform any diligence of their own, or can they rely on self-
certification by vendors?
Continued.
 7
5. LEVEL PLAYING FIELD: PN 2 of 2018 requires that the services provided
should be uniform and on arm’s length basis and in fair and non-
discriminatory manner. The entities are required to provide same
service under similar circumstances.
But the parameters of ‘similar circumstances’ have not been given by
the policy. Cashback has been classified as fair and reasonable.
6. FDI in B2C Model has been completely forbidden. The conditions
mentioned in Press Note 3 of 2016 have been deleted.
The inconsistencies in the FDI guidelines regulating e-commerce open
a Pandora’s box when it comes to interpretation and implementation
of restrictions.
In an attempt to make the regulations more vivid, the Department has
come out with a Draft on National Policy on e-commerce.
 LOOPHOLES IN PRESS NOTE 2 OF 2018 8

Following loopholes can be addressed by DPIIT:

o In the definition of E-Commerce, the term ‘digital product’ has not
been defined and neither has been provided in the clarifications of
the said Press Note.
o The procedure for certificate of Compliance has not been
explained and even the appointment of auditor by RBI has not
been clarified.
o Presumption of exclusive agreement/arrangement always to be
anti-competitive in nature.
o No clarification to the clause relating to 25% purchases of the
Vendor has been provided.
Thus due to lack of clarifications and existence of ambiguities the FDI
policy has been subject to criticism.
 DRAFT NATIONAL E-COMMERCE POLICY 9
 The government released the draft national e-commerce policy
proposing setting up a legal and technological framework for
restrictions on cross-border data flow and also laid out conditions for
businesses regarding collection or processing of sensitive data
locally and storing it abroad.
 The 42 page draft addresses 6 broad issues of e-commerce sector:
 1. Data
 2. Infrastructure development.
 3. e-commerce marketplaces.
 4. Regulatory Issues.
 5. Stimulating Domestic digital economy.
 6. Export promotion through e-commerce.
 KEY FEATURES OF THE DRAFT POLICY 10

The new Draft National Policy on E-commerce is an attempt by the

government to address which have not been covered yet by the FDI
policy or the clarification notes issued by DIPP. The following features
are the areas which have been addressed in e-commerce for the first
time:
1. It aims to create a framework for achieving holistic growth of e-
commerce sector along with existing policies of make in India &
Digital India.
2. Focus on Data Protection- Data is the new oil.
3. Artificial Intelligence.
4. Data Sharing with third parties
5. Definition of E-commerce.

Continued.
 11
6. Data Protection and IP Laws.
7. Prohibition on sale of counterfeit products and prevention of other
mal practices.
8. Current policy of not imposing custom might be reviewed.
9. Level the playing field and discourage capital dumping.
10. Talks about an integrated system which connects Customs, RBI
and Indian Post.

In the words of Pratibha Jain* the new Draft National Policy is , ‘A

Policy on how to nationalize e-commerce and take control over
data.’

*Associate at Trilegal.
 SHORTCOMINGS OF THE DRAFT POLICY 12

Creation of a separate E-Commerce Policy is one of the best

decision taken by the government:
1. It should be more inclusive for the domestic players.
2. The delay in time has only led to speculations.
3. The new draft can be implemented only if reciprocity is there.
4. Lack of procedural mechanism.
5. It is more of a vision statement than a policy.
6. The right to data protection is held to be a sovereign right for
citizens only.
7. Policy drafted in Isolation.
 WHAT TO EXPECT ? 13

Considering the approach and decision taken earlier, the following

can be expected:

1. Stringent Policy for E-commerce marketplace entities.

2. Tighter regulations regarding Data localization.
3. Widening the scope of the E-commerce policies.
4. Consumers benefit schemes.
5. Stricter Import policies.
 Suggestions 14

It can be expected that a better Policy will come into action, and
for that to happen following things can be done:

1. Consider the suggestions given by Inter ministerial committee.

2. Formulate a more comprehensive policy which can form a
harmonious construction with other existing laws. It can not be in
isolation.
3. Encouragement to the domestic players should be given
instead of levelling the playing field.
4. Explanation of various terminologies shall be stated instead of
taking a generic approach.
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THANK YOU.