Guidelines on FDI policy for E-Commerce Sector

Varun Hariharan

19 Jun, 2020

Overview of FDI policy for the E-Commerce sector

The Government of India (GOI) has brought about rules related to the FDI policy for E-Commerce Sector. This policy has been influenced by various meetings and discussions between market participants. The market participants brought out suggestions on the FDI policy for E-Commerce Sector. Indian Government has amended the FDI policy for e-commerce sector to balance the needs of national interest and foreign investment.

Development of E-Commerce Activities in India

According to the Global Development Index (GDI), India is ranked as one of the largest sectors for online retail markets and e-commerce activities. Factors that affect this are constant urbanization, digitization, large population, and the ability for growth. In retail trading, the e-commerce sector has witnessed phenomenal growth in the past decade. Due to this, foreign companies and governments are willing to invest more in India. The E-commerce sector contributes to about 10% of the gross domestic product (GDP) and generates about 8% of the employment of the country.

Research suggests that the e-commerce sector would reach a figure of USD 1.3 trillion by 2020. However, Covid-19 pandemic has devastated the global economy. With the downfall of the global economy, the e-commerce sector in India has also been drastically affected.

Factors related to FDI policy for E-Commerce Sector:

• Between the years of 2014-2017, the e-commerce sector has contributed more than 3 billion dollars.
• FDI policy for the e-commerce sector has promoted and increased employment activities in India.
• By 2022, lot of foreign companies would be contributing directly to e-commerce activities in India.
• FDI routes are through the automatic route and the government/ approval route. FDI approval is solely based on the discretion of the government.

With the above developments, the government has strived to bring out an FDI policy for e-commerce sector, which would balance the interests among traditional market players and e-commerce giants.

Foreign Direct Investment Routes

Foreign Direct Investment is a form of investment in which the foreign company or partnership invests or subscribes to the shares of an Indian company. A foreign entity or a non-resident Indian can invest in an Indian company through the Foreign Direct Investment routes.

The following are the routes for foreign direct investment:

• Automatic Route- Under this route, no prior approval is required from the government of India. Therefore an investor does not need any form of permission from the RBI (Reserve Bank of India) or any other authority to invest through this route.  Investment up to 100% is allowed through the automatic route. However, the government can restrict the investment up to a certain percentage for the automatic route.  The rest of the investment has to be obtained through the government route.
• Approval Route- Under the approval route, prior consent or approval is required from India’s government before investing in a particular sector. Sectors under the approval route are more sensitive and deal with matters related to the national interest.

Regulation on FDI policy for E-Commerce Sector

The RBI regulates foreign exchange in India. The law that affects foreign exchange in India is the Foreign Exchange Management Act, 1999. Apart from this, the RBI brings regulations that affect the applicability of foreign exchange laws in India. Apart from RBI, the Department of Industrial Policy and Promotion (DIPP) governs Foreign Direct investment in India. The authority of the DIPP is replaced by the Department for Promotion of Industry and Internal Trade (DPIIT).

All circulars related to foreign investment are given to the DPIIT for approval before implementation. Therefore foreign exchange and foreign investment in India is regulated by multilateral institutions.

FDI policy for E-Commerce by RBI and DPIIT

Since 2000, the Government of India was trying to bring a law on foreign direct investment for the E-commerce sector. Foreign direct investment (FDI policy for E-Commerce Sector) is a debatable issue as the livelihoods of many individuals depend on the domestic supply of goods. Traditional players such as small-time shops, mini retailers, and big retailers would depend on running their shops for selling products.

However, due to India’s progression and development, the government has introduced various policies that would benefit both sides of the market.

FDI policy for E-commerce- Press Note 2000

The Government of India, RBI and DIPP brought out the first-ever foreign direct investment policy for foreign investments in 2000. This was considered by the GOI press note 2000 series on foreign direct investment.

This notification was an eye-opener for foreign direct investment in India. This initiative was gladly welcome with open arms by e-commerce companies that were beginning a business in India.

The features of the 2000 press note notification on FDI are as follows:

• Under this notification, 100% Foreign Direct Investment was allowed in Business to Business (B2B) sectors for conducting e-commerce activities. This included buying and selling of goods by businesses.
• This was only allowed provided the e-commerce company receiving foreign direct investment divested about 26% of their equity share or stake in the company. This divestment should take place five years after receiving the investment from the foreign investor.
• This divestment will only be required if the company has its presence in other parts of the world. Therefore, if an e-commerce company is present in America, it would have to divest about 26% of India’s equity share to the public after five years.
• Foreign Direct investment from business to consumers (B2C) was allowed, but it was under scrutiny by the government under this press note.

This press note brought about various retaliations from various organizations. The opposition was brought out by unions such as Swadeshi Jagran Man, which supported retailers and other associations. Apart from this, the opposition was brought by foreign governments regarding the move by the government. Communities brought protests as the national interests of the country were affected. Some market participants hailed the outcome of this deal as it supported an increase in market participation for domestic firms.

FDI policy for E-commerce- Press Note 2006

Many companies came up to voice their opinion about the previous policy. This opinion was given to the Foreign Investment Promotion Board (FIPB). Some companies claimed exemption from the 26% divestment.

Due to opposition, the government was forced to remove the criteria for divestment from the FDI policy for E-Commerce in 2000. This was removed by the government in the press note 2006 series.

Consolidated FDI Policy for E-commerce- 2010

The DIPP and GOI brought out the consolidated e-commerce policy, providing meaning and definition for Foreign Direct Investment in E-commerce activities.  In this consolidated FDI policy for E-commerce, the definition of e-commerce activities is provided.

Though the consolidated FDI policy in 2010 defined e-commerce activities, it did not specify whether e-commerce activities would be B2B or B2C.

FDI policy for E-Commerce- 2012

A cynical view for FDI in e-commerce activities was considered in the 2012 press note series. While the DIPP allowed few activities under different routes, B2C retail trading was barred for e-commerce companies with foreign direct investment. This was barred irrespective of the type of activities that the e-commerce business carried out. B2C was barred for Single Brand Retail Trading (SBRT) and Multiple Branch Retail Trading (MBRT).

The Features of FDI policy for E-commerce 2012 press note series are as follows:

• The percentage of investment allowed under SBRT was 100% FDI. For MBRT, only 51% of FDI was allowed.
• Many companies opposed this move by the government as severely nationalistic.
• Through several rounds and discussions, Nasscom and a few other participants considered that FDI for B2C e-commerce activities should be allowed subject to certain conditions.
• The Retailers Association of India (RAI) supported this view as it was purely nationalistic and supported the domestic economy.

FDI policy for E-Commerce- 2015

In 2015, Mrs. Nirmala Sitharaman, along with several e-commerce companies, FICCI and Confederation of Indian Industry (CII), discussed the outcome of the above policy. The minister considered if the above policy was amended, then it would be a severe detriment to domestic retailers as their economic livelihood depends on business activities. However, due to pressure, a consensus was reached between the government and the market participants.

According to the above press note, an Indian company or Indian manufacture could sell retail products online under the SBRP. However, 70% of the goods have to be manufactured in-house, and 30% of the value of the goods has to be sourced from Indian entities. Only FDI for SBRT was allowed under this FDI policy for e-commerce. Proposals for introducing FDI for MBRT were not allowed by the government.

FDI policy for E-Commerce- 2016

Due to complications in the previous press note, several companies like Amazon and Flipkart created complex structures to operate within India’s different business sectors. Due to this, the RAI put a petition regarding the practices created by these companies. The petition was put on the structures used to circumvent the FDI policy. Such structures used were against the FDI policy.

Due to this, the Government of India expanded the definition of E-commerce activities in the 2016 press note. This new regulation allowed e-commerce businesses to provide support services to consumers. However, companies were not allowed to exercise any form of ownership or influence the price at which the goods were sold.

These guidelines were a boon to traditional retailers in the market. However, this regulation did not provide a concrete meaning to a single vendor system.  Single vendor restrictions were not imposed on domestic e-commerce companies such as reliance.

Confederation of all India Traders (CAIT^[1]) also mentioned that global e-commerce retailers would come up with a solution to circumvent the regulations and comply with the FDI rules. In a comment made by the CAIT, the restrictions applicable to MBRT would also be circumvented by e-commerce companies.

2018 Press Note Series

In this press note, the DPIIT introduced a major change to the current FDI policy. This was intending to balance the interests between small traders and foreign investors.

Features of the 2018 Press note on FDI:

The following are the features of the 2018 press note on FDI:

• Control and ownership must be carried out by the e-commerce company. In such circumstances, an inventory model can be used by the e-commerce activity to conduct business.
• This press note barred e-commerce companies from selling goods of any vendor in which the group companies had some form of equity partnership.
• Merchants were also prohibited from selling goods exclusively on the platform.

Though this press note strived to maintain the balance of interest between the traditional players and modern e-commerce companies, issues still arose.

The DPITT gave clarity in 2019 that e-commerce could not evade the rules. The policies which were adopted have to be followed by different e-commerce players.

2019 Press Note Series

In 2019, the Union Government approved another press note series that regulated the operation of SBRT.

The following features were considered in this press note series:

• Online e-commerce activities were allowed for SBRT.
• If a company is starting online e-commerce for SBRT, then physical shops should be established within two years from starting e-commerce.

Previously, under the SBRT system, companies had to set up shops and physical stores first and then open online e-commerce business. This would create a disparity in the number of goods and services offered by the shop regularly.

Conclusion

2016 press note allowed FDI for SBRT. After discussions in 2019, online e-commerce was allowed for SBRT. However, the company would have to open a physical store for two years. From the above amendments, the Government of India has tried to balance traditional players’ interests and foreign players.

Also, read: FEMA Compliance on Export of Goods and Services