10
Mar2019

CHANGE IN FOREIGN DIRECT INVESTMENT IN INDIA WITH EMERGING E-COMMERCE

An E-commerce entity is an intermediary defined under Section 2(1)(w) of the Information Technology Act, 2000. This definition clearly stipulates that the ‘E-commerce entities have to provide an information technology or electronic platform and act as a facilitator between a buyer and a seller’. E-commerce sector over the years through its various offers and deals has outshone the traditional market sellers. Companies like Amazon and Flipkart have made huge gains in only a few years’ time whereas traditional market sellers have suffered huge losses. The deals offered by these E-commerce platforms are very attractive and customers are offered prices on items which are well below their actual price. In All India Online Vendors Association vs. Flipkart India Private Limited and Anr[1] a complaint was made to the CCI against Flipkart for abusing its dominant position in the market which negatively affects traditional businesses and contravenes Section 4 of the Competition Act, 2002, however, flipkart was not found to be acting in contravention of the aforesaid provision and was able to walk scot free.

After the FDI norms were changed and came into force on 1st February 2019 it gave breathing space to the traditional market sellers who were marred by monopolistic behavior of the E-commerce entities. However, what ought to have been done by the CCI has been done by the government that is creating a level playing field, which was dominated by the E-commerce companies.

 

CHANGES MADE IN THE FDI POLICY

In the Press Note 2 of 2018[2] issued by the Department of Industrial Policy and Promotion (“DIPP”) E-commerce entity was defined as a company incorporated under the Companies Act, 1956 or Companies Act, 2013 or an office branch or agency in India as provided under Section 2 (v)(iii) of the FEMA, 1999 owned or controlled by a person resident outside India and conducting E-commerce business i.e. buying and selling of goods and services including digital products over digital & electronic network which includes network of computers, T.V. Channels, and any other internet application used in automated manner such as web pages, extranets, mobiles etc.

The above-mentioned press note permits only the marketplace model of E-commerce in which 100% FDI is allowed and prohibits FDI in the inventory based model of Ecommerce. An E-commerce entity will be rendered as Inventory based E-commerce model if it controls more than 25% of the vendors goods that is 25% of the purchase of the vendor’s goods are made from the marketplace. This means that the vendor cannot sell all its products on a single online platform and E-commerce also cannot mandate that a particular product of the seller is sold on a single E-commerce platform and not on other platforms otherwise it will lead to the Ecommerce entity acting as an Inventory based E-commerce model. Hence, E-commerce entities will be permitted to enter into transactions with sellers registered on its platform on B2B basis and cannot enter into B2C wherein it is selling directly to the consumers.

An entity having equity participation by E-commerce market place entity or its group companies having control over its inventory by E-commerce market place entity will not be permitted to sell its products by such marketplace entity as other sellers on the E-commerce platform face discriminatory treatment as compared to the products which are owned by the E-commerce entity.

The E-commerce entity selling shall provide complete information of the sellers whose goods are being sold on its platform to the consumers; payments shall be facilitated in accordance with the guidelines issued by RBI, however, after the product has been sold it is only the seller who will be responsible for the warranty of the goods and accordingly the E-commerce entity will not be liable. The E-commerce entities shall not in any manner discriminate the prices of the goods being sold on its platform, and shall not provide for discriminatory cashback as it amounts to predatory pricing.

EFFECT OF CHANGE IN FDI RULES

The change in the FDI norms has brought positives for traditional sellers which will see revival of offline business which is an important aspect of the Indian economy. Also, the change has far-reaching effect on E-commerce sector and the trump administration has started to exert pressure on the Indian government to take back this change as it is hurting two of the biggest American businesses.

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[1]https://www.cci.gov.in/sites/default/files/20-of-2018.pdf

[2]https://dipp.gov.in/sites/default/files/pn2_2018.pdf

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