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The Impact Of New FDI On E-Commerce Retailers And Business

Swarit Advisors

| Updated: Feb 27, 2019 | Category: E-commerce, News

Department of Industrial Policy and Promotion (DIPP ) on 26th December 2018, introduced a press note proposing to make certain changes in the existing 2017 policy governing foreign direct investment in the e-commerce sector.  On 27th December 2018, the Government made certain amendments in the existing Foreign Direct Investment(FDI) policy for online retailers.

But before we discuss the new FDI policy, it is necessary to know what is FDI? FDI means an investment made by an individual or a firm of one country in the business of another country. Changes made in the  Foreign Direct Investment (FDI) policy restricts e-commerce firms from selling products of entities in which they have an equity stake. As per the provision of new FDI policy, entities engaged in such type of business will engage only in Business to Business firms and not in Business to Consumer companies.

In this blog, we will discuss the changes brought in Foreign Direct Investment policy and on electronic commerce retailers and business.

What is the Meaning of E-commerce?

In general terms, E-commerce means buying and selling of goods or products including digital products over a digital & electronic network. ( For example buying and selling of  goods on Snapdeal, Myntra, Flipkart, etc.)

E-commerce Entity 

If you are interested to know about guidelines of changes made in FDI policy, then you must have knowledge about E-commerce entity.

This type of an entity means a company which is incorporated under The Companies Act, 1956/2013 to conduct electronic commerce business. A foreign company which is owned by a person resident outside India and engages electronic commerce business falling under the definition of e-commerce entity.

Types of Models of E-commerce

There are two types of models of E-commerce:

1) Inventory based model

2) Marketplace based model

1)Inventory based model  – Inventory based model refers to an activity where an e-commerce entity owns an inventory of goods and sells the goods to the consumer directly.

2) Marketplace based model – Marketplace based model is meant for providing information technology platform by an e-commerce entity on a digital and electronic network to act as a promoter or coordinator between the buyer and seller.

Impact of FDI policy on e-commerce businesses

The online e-commerce business entity like Amazon and Flipkart encourage their sales and source through their vendors. The customers who buy products sold by these vendors get additional and more benefits in terms of fast delivery, discount and cash back.

As the new norms of FDI policy aim to stop the anti-competitive behavior of these e-commerce entities, so changes made in FDI policy must have an adverse impact on E-commerce businesses as well as companies. Vendors of Amazon and Flipkart cannot sell their own products on the company’s portal.

Amazon and Flipkart now cannot insist on their exclusive relationship with the brand owners. As per norms of FDI policy, Amazon and Flipkart are prohibited to offer a huge discount to their customer.

What are the Guidelines for  Foreign Direct Investment on E-commerce Sector 

Recent FDI policy of 2017 provides some guidelines for Foreign Direct investment in the e-commerce sector. As per such guidelines:

In operation of the market place model, 100% FDI is permitted.

No FDI is permitted in inventory based model.

What are the Provisions for FDI in e-commerce?

Department of Industrial Policy and Promotion had clarified the following provisions for FDI in e-commerce:

  • As per recent FDI policy, FDI is permitted only in the Business to business (B2B) e-commerce segment and not in the Business to consumer(B2C) segment. (Inventory based model)
  • According to the rules and regulation of FDI policy, 2017, B2B an entity providing marketplace shall not either directly or indirectly affect the sale price of goods or services. If an entity does so, then the business will be treated as Inventory based model.

Other Mandatory  Conditions of FDI policy 

The Government of India made changes and added certain conditions in the FDI policy. Following are certain conditions:

  • The market place e-commerce firm cannot exercise its control over the inventories of any inventory firm.
  • Market place entity is permitted to enter into transactions with other sellers registered it’s portal on a B2B basis.
  • A Marketplace can provide support services to sellers in respect of call center, payment collection etc.
  • Digital and electronic network will include TV channels, computer networks any other interment application used in an automated manner. (Mobiles, Webpages etc).
  • An e-commerce entity shall not sanction more than 25% of the sales value on financial year basis affected through its marketplace from one vendor or their group companies. [source: dipp.gov.in]
  • In a market place model, goods or services available for sale on the website must clearly provide name, address and other necessary details of the seller.
  • After the sale of the goods and services to the customer, customer satisfaction will be the responsibility of the seller.
  • Under the marketplace model, payment of sale may be done by an e-commerce entity in compliance with the guidelines of Reserve Bank of India.
  • Guidelines on cash and carry wholesale trading will only apply to the B2B segment.

Conclusion
From the above discussion, we can conclude that the economic development of the country strongly depends on FDI. The most important outcome of FDI in India is its contribution to the growth of the Indian economy. The main purpose of the changes made in the FDI policy of 2017 is to prohibit the anti-competitive behaviors of such entities and to enhance the growth of small scale business entities. However, there has been an adverse impact of policy changes of FDI on the businesses. Now, they are restricted to offer huge discounts on the products unlike they used to do before. We can say that the new FDI policy has impacted the business in both ways- positive and negative.

If you want to know more about the impact Of  New FDI policy On E-Commerce Retailers And Business, then kindly contact us.

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Swarit Advisors

Swaritadvisors.com is technology motivated platform establishing the specialized legal & Financial advisory services in India. We are dedicated to helping startups and MNC in solving legal, Taxation and compliance related to starting and running their business around the world.

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