The Department of Industrial Policy and Promotion (DIPP) recently released a Press Note (PN) 2 of 2018 by introducing sleuth of additional parameters in the ever growing e-commerce sector under the Foreign Direct Investment (FDI) Policy of India on 26th December, 2018 which will come into effect from 1st February, 2019. To shed some light on the objectives of that policy and to further cast away the doubts settling in the industry regarding the policy, the Government of India (GOI) on 3rd January, 2019 released a clarification on it.
Prior to these amendments, the FDI Policy permitted foreign direct investments in entities engaged in marketplace model of e-commerce with no government approval (via automatic route), and prohibited FDI in entities engaged in inventory based model of e-commerce. A marketplace model of e-commerce means where an information technology platform of a digital and electronic network is provided by an e-commerce entity, which acts as a facilitator between buyer and seller. On the other hand, inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the customers directly.
It is evident from the PN 2 of 2018 that government is desirous for better implementation of FDI in the e-commerce sector by introducing a myriad of changes. This includes new regulations relating to inventory control, affiliated sellers, and exclusive arrangements. According to the clarification, the government had received numerous complaints that certain e-commerce marketplace platforms were indirectly engaging in inventory based model. These changes are not really new but simply a clarification for better implementation of existing regulations.
- Fair and transparent business practices:
As per the clarification, marketplace entities are required to provide the same suite of services to all sellers under similar circumstances. Additionally, cashback offers provided to the buyers by group companies of marketplace entities will have to be fair and non-discriminating. PN 2 of 2018 specifies the that service terms offered by the service providers to one or more sellers, but that are not offered to other sellers in similar circumstances, will be deemed to be unfair and discriminatory. But it becomes tedious for the players in absence of any guidelines from the government to determine that whether those two sellers are in similar circumstances or not.
- Exclusivity arrangements:
PN 2 of 2018 requires that an e-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only. The e-commerce entities cannot enter into agreement for the exclusive sale of products. There is no guidance on how the enforcing authorities would determine whether a seller has been coerced to sell its products exclusively on that platform, or if the seller is choosing to do so voluntarily. For instance, some brands with limited sale in India have made a conscious decision to have an online presence only, so as to be on a better footing to control their operational costs and reduce logistical challenges around pan–India offline distribution network. For them it might make business sense to have an exclusive tie-up with one e-commerce platform.
- Control over inventory:
The existing FDI policy provides that e-commerce marketplace entities should not exercise ownership over goods sold on such marketplaces. It also requires that a single seller/group should not account for more than 25 % of the aggregate sales on that marketplace. While e-commerce entities complied with the requirement to not own inventory, there were complaints that some of them exercised indirect control over such inventory through warehousing, packaging and handling arrangements. PN 2 of 2018 has introduced a new provision under which an e-commerce platform will be deemed to exercise control over a seller’s inventory, if 25% or more of such vendor‘s purchases are from e-commerce entity or its group companies. PN 2 of 2018 prohibits the vendor from selling their products on platform of e-commerce marketplace entities, if such e-commerce entity is deemed to have a control over the inventory of a vendor. The regulatory objective behind this is to limit the ability of e-commerce marketplaces to sell products to a vendor on a B2B basis, and thereby control pricing or reduce the inventory carriage risk for the vendors themselves.
PN 2 of 2018 requires an e-commerce entity to furnish a certificate annually, confirming compliance with these guidelines. However, it is hard for the e-commerce entities to provide this certificate because of the unclear compliances related to vendors. These changes will come into effect from 1st February, 2019, by giving the.
In a nutshell, these changes would have a significant impact on the e-commerce sector as the entire sector has less than a month to re-organize itself to comply with the present policy. The Government of the day should have veered off from such drastic changes introduced via this policy and should have been considerate to the fact that these players are now one of the major drivers of the economy. The more apt way should have been to gradually introduce these changes over a long haul so that the players have ample buffer to adapt their business practices in compliance with the policy. These new guidelines could have an impact on the digital payments sector, and the broader financial technology industry, especially vis-à-vis the obligation to adopt a fair and non-discriminatory approach. It will be interesting to see how the e-commerce sector adapts to the multiple regulatory changes with already some discontent brewing from the heavy hitters of the sector.
Associate Partner at Aggarwals & Associates, Mohali.