Investment control and the e-tailing marketplace

By Rajat Mukherjee and Arjun Rajgopal, Khaitan & Co
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Over the past few years, India has seen the rise of a robust e-commerce economy with all kinds of merchandise being sold to customers through online platforms. E-commerce revenues were over US$14 billion in 2012, having more than doubled from 2011, and are estimated to reach US$38 billion by 2015. E-commerce in India has attracted the attention of large and respected investors from across the globe, including major private equity, venture capital and sovereign wealth funds. Most of the e-commerce businesses which have succeeded have received some form of foreign direct investment (FDI).

From a legal standpoint, it is clear that e-commerce companies which have foreign investments cannot engage in direct selling to end customers, i.e. they can only engage in business-to-business (B2B) trading. This has affected the structure of many e-commerce businesses.

Rajat Mukherjee
Rajat Mukherjee

Common structures

In one common structure, the foreign investor invests in an operating and holding company which is ultimately majority owned and controlled by Indian citizens. Any downstream investment through this holding company into any entity carrying on direct retail (B2C) trading is not regarded as indirect foreign investment.

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Rajat Mukherjee is a partner and Arjun Rajgopal is a senior associate at Khaitan & Co. The views of the authors are personal and should not be considered as those of the firm.

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