Easy-commerce?

[The following guest post is contributed by Arup Pereira, who is a Principal Associate
at J. Sagar Associates, Mumbai]
The Government’s foreign
direct investment (“FDI”) policy on
retail trading in India encourages foreign companies and Indian companies with
foreign investment to “Make in India”.
At
present, FDI is not permitted in an Indian company engaging in business to
consumer (“B2C”) e-commerce, except
in cases of a manufacturer selling its products manufactured in India, a single
brand retail trading entity operating through brick and mortar stores or an
Indian manufacturer selling its own single brand products manufactured in India.
In the third instance, the exemption is subject to the conditions that the
Indian manufacturer owns the brand under which at least 70% of the products are
manufactured in-house and no more than 30% is sourced from other Indian
manufacturers. The FDI policy prohibits companies
with FDI from engaging in
multi brand retail
trading, in any form, by means of e-commerce.
In the recently issued Press Note 3 of 2016
regulating FDI in the e-commerce sector (“E-Commerce
Guidelines
”) the Government has sought to provide clarity on the policy
framework for FDI in e-commerce. E-commerce has been defined to mean buying and
selling of goods and services including digital products over digital and
electronic networks. As per the E-Commerce Guidelines, 100% FDI is permitted in
the marketplace model of e-commerce under the automatic route (i.e. no approval
of the Government or the Reserve Bank of India is required for such foreign
investment). However, FDI in the inventory based model of e-commerce is
prohibited.
In a marketplace model of e-commerce, the
e-commerce entity provides the technology platform on a digital or an
electronic network to facilitate transactions between a buyer and a seller of
products or services. In an inventory based model of e-commerce, the inventory
of goods and services is owned by the e-commerce entity itself and is sold by
the e-commerce entity directly to the consumers. The e-commerce entity could be
either  a company incorporated in India,
a foreign company having a place of business (physical or electronic) in India
directly or through an agent and conducting business activities in India, or an
office, branch or agency in India which is owned or controlled by a non-resident.
One of the conditions imposed
on the marketplace model of e-commerce under the E-Commerce Guidelines
restricts an e-commerce entity from permitting more than 25% of the sales affected
through its marketplace from one vendor or its group companies. Another
condition prohibits an e-commerce entity from directly or indirectly
influencing the sales price of goods or services sold through its market place
and requires the e-commerce entity to maintain a level playing field. The sales
limit restriction appears to apply not only to the group companies of vendors
selling through the marketplace of the e-commerce entity but also to group
companies of the e-commerce entity itself. It would also affect individuals,
partnership firms and companies in India (not having any foreign investment)
who may be vendors on the marketplace of the e-commerce entity.
It is unclear how the sales
limit restriction imposed per vendor would boost the Government’s ‘Make in
India’ policy.
There does not appear to be any rational
nexus between this restriction and the objectives underlying the Government’s
FDI policy on retail trading in India, as explained above. The Indian Constitution guarantees its citizens and companies
incorporated in India the
fundamental right to carry on any occupation,
trade or business, while permitting the Government to impose reasonable
restrictions on this fundamental right in the interests of the general public. In the event the sales limit restriction is challenged
before the Indian courts by vendors not having any foreign investment, on the
ground that it interferes with their fundamental right to carry on business in
India, it remains to be seen whether the Indian courts (in the exercise of
their writ jurisdiction) would uphold such a restriction as being
a
reasonable restriction in the interests of the general public.
The sale limit restriction also presents
certain operational challenges to e-commerce entities from a compliance
perspective. Since this restriction would need to be applied on the basis of
the aggregate sales within a particular reference period of all vendors
registered with the e-commerce entity and the E-Commerce Guidelines do not
specify such reference period (for example, whether monthly, quarterly or
bi-annually), it would be difficult for an e-commerce entity to monitor and
enforce this restriction on a real time basis. It would also result in an
additional administrative compliance burden on the e-commerce entity. Even if
the Government does stipulate such reference period, it may unfairly prejudice
the economic interests of certain vendors. For example, a vendor who is
restricted from selling further on the marketplace of the e-commerce entity on
the ground that its sales have exceeded 25% of the aggregate sales of the
e-commerce entity during the previous month or quarter, may not fall within the
sales limit restriction per vendor on the basis of the aggregate annual sales
of all vendors on the marketplace of the e-commerce entity during the entire
financial year. Since the e-commerce entity is required to maintain a level
playing field and is prevented from influencing the sale price of goods and
services sold through its market place (whether by offering discounts or
otherwise), this restriction is also susceptible to a challenge before the
courts on the ground that it unreasonably restricts such vendors’ fundamental
right to carry their business in India, as explained earlier. 
The E-Commerce Guidelines also do not
specify the manner in which an e-commerce entity is required to identify group
companies of the vendors registered with it. However, the e-commerce entity can
address this issue to an extent by obtaining from a vendor the requisite
declarations (including information about its existing group entities) at the
time of such vendor’s registration with the e-commerce entity. One of the
conditions of registration should be an obligation on the vendor to promptly
notify the e-commerce entity of any change in the information declared at the
time of its registration, and breach of such obligation could result in
cancellation of the vendor’s registration and termination of its ability to
sell on the marketplace of the e-commerce entity. In such event, the Government
may consider clarifying that the consequences of such breach would be faced by
the vendor concerned and not the e-commerce entity.
The E-Commerce Guidelines were brought into
effect immediately on the date of their issue. In keeping with the Government’s
stated intent of improving the ease of doing business in India, it should clarify
its position on the above ambiguities in the E-Commerce Guidelines at the
earliest after obtaining feedback from all the stakeholders and also provide a
reasonable time frame to enable existing e-commerce entities to comply with the
same.

– Arup Pereira

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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