Press Note 3 of 2016: A level playing field?

By Samir Dudhoria and Ankita Kansil, Luthra & Luthra Law Offices
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On account of a legal vacuum on the permissibility of foreign direct investment (FDI) in e-commerce activities being undertaken using a marketplace model, many entities with foreign investment have been operating on the “view” that using this model would not fall foul of the extant foreign exchange regulations. The Department of Industrial Policy and Promotion has, through Press Note 3 at of 2016, attempted to bless the operations of many e-commerce giants, bringing much needed clarity to the FDI policy in the e-commerce sector.

Samir Dudhoria
Samir Dudhoria

Press Note 3 has given specific meanings to terms such as “e-commerce”, “e-commerce entity”, “marketplace model” and “inventory based model”. The FDI Policy, 2015, vaguely defined e-commerce as the “buying and selling by a company through the e-commerce platform”. Under Press Note 3, e-commerce is defined as “buying and selling of goods and services including digital products over digital and electronic network”, thus including even service providers, such as food, taxi and other service aggregators, and digital content providers, which tend to be shadowed by the discussions around the big players in the e-commerce segment.

An e-commerce entity is defined as “a company incorporated under the Companies Act 1956 or Companies Act 2013 or foreign company covered under section 2(42) of the Companies Act 2013 or an office, branch or agency in India as provided in section 2(v)(iii) of the Foreign Exchange Management Act, 1999, owned or controlled by a person resident outside India and conducting the e-commerce business”.

Press Note 3 defines a marketplace model as “providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller”. It clarifies that while 100% FDI under the automatic route is permitted in entities using a marketplace model of operation, entities using the “inventory based model” – defined as “model of e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly” – are prohibited from receiving foreign investment. In other words, an e-commerce entity operating under a marketplace model cannot own the inventory, and must merely act as a conduit between the seller and the buyer.

Press Note 3, in the garb of providing “clarity” on the permissibility of FDI in e-commerce activities, has introduced certain conditions, to the displeasure of online marketplace operators. It stipulates that an e-commerce entity will not permit more than 25% of its sales from a single vendor or its group companies. Players with vendors that account for more than 25% of their sales would now need to ensure that the activities of such vendors do not breach the prescribed threshold. While it seems that this is intended to apply to the value of annual sales, e-commerce entities may have to bring in robust mechanisms to ensure compliance with this requirement on a continuous basis. Given the huge number of players in the market, the government may have to rely on self-certification by e-commerce entities, which in turn would be relying on representations given by the vendors.

Ankita Kansil
Ankita Kansil

Another cause for concern for e-commerce entities is the condition requiring them to not “directly or indirectly influence the sale price of goods or services” and to “maintain a level playing field”. This comes as a setback to e-commerce entities which have so far been operating on low-cost business models, which they in turn use to attract cost-sensitive consumers by offering attractive discounts. After not objecting to the operations of e-commerce entities all these years, the government has now introduced guidelines which have altered the rules of the game midway. E-commerce players are being forced to rethink their business model to maintain a level playing field where none exists, and would no longer be able to pass on the benefits of economies of scale and lower costs to consumers.

Press Note 3 has affirmed that e-commerce entities are permitted to provide support services such as warehousing, logistics, order fulfilment, call centre and payment collection, but it has been clarified that vendors must bear the responsibility of post-sales delivery of goods and customer satisfaction, as well as any warranty/guarantee of goods and services.

Although Press Note 3 is stated to be “clarificatory” in nature, immediate compliance with some of the new conditions it has introduced may prove challenging. It is effective immediately, and does not provide any grace period for existing players to bring their business models in line with the stipulated conditions, particularly in relation to allowing no more than 25% of sales through one vendor or its group companies.

Press Note 3 should also aid in resolving ongoing litigation between e-retailers and traditional retailers, and is intended to be a move towards balancing the interests of online and offline retailers and ensuring a level playing field for all parties concerned, albeit to an extent at the cost of the final consumer, who may no longer benefit from lower prices.

Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Samir Dudhoria is a partner and Ankita Kansil is an associate at the firm. The views of the authors are personal. This article is intended for general information purposes only and is not a substitute for legal advice.

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