FDI Regulations that e-commerce start-ups must know

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In the year 2016, with an aim to bolster the progress of e-commerce in India, the government allowed 100 per cent Foreign Direct Investment (FDI) through the automatic route for the online sale of goods and services. Before this was done, e-commerce was allowed only in the B2B type of businesses and not B2C type. This meant that only businesses supplying intermediate goods or raw material could undertake sale and not to the final customer. It was felt that such a model was inhibiting the growth story of the budding e-commerce industry in India intersected by new startups and the increasing inflow of foreign investment.

Inventory-based and market-place based models of e-commerce – What are they?

As the current FDI policy stands, there is no prohibition in seeking investments for the marketplace model for e-commerce; however, the inventory based model continues to be heavily regulated with no scope for foreign investment in the same. In a marketplace model, the e-commerce platform, akin to a market, merely provides a platform for buyers and sellers to interact and may also providing necessary services like packaging, shipping and delivery. Classic examples are Amazon and Flipkart, which do not have goods of their own but offer services to sellers to reach out to a large base of customers. However, in an inventory-based model, the online company owns good and may also sell them under its own name while taking care of the entire process from procurement of goods or manufacture to actual delivery. 

While a marketplace model is highly scalable as it can encompass a wide variety of goods, it suffers from quality concerns due to the presence of a large number of sellers. In an inventory based model, there is greater control, access to resources and hence, an ability to derive huge profit margins. There can also be hybrid models involving a combination of both inventory and market traits, however, unless an entity is a 100 per cent marketplace style, it cannot raise foreign capital.

What happens to warranties and guarantees in online retailing?

The FDI policy has clarified that the e-commerce company operating in the marketplace model will not bear any responsibilities of warranties. The warranty/guarantee of products or services sold online will be borne by the sellers themselves. This means that while setting up an online retail company, your contracts must mandatorily include a clause transferring the onus of meeting such obligations on the sellers.

FDI policy for manufacturing entities

The FDI policy provides that a manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce, without Governmental approval. Thus, manufacturing entities selling their products on e-commerce retail can accept FDI up to 100% under the automatic route.

FDI policy for trading entities

For those businesses that are engaged in B2B trading – which may be in cash or wholesale trading, a 100 per cent automatic approval route FDI is permitted. Although it excludes any retail sales, selling to industrial, commercial, institutional and professional business users are considered wholesale customers, even if they might be consumers.

FDI prohibition in Multi-brand Retail Trading (MBRT) business

There is a complete prohibition on e-commerce presence by those entities which have FDI in the multi-brand retail trade. Multi-brand retail trading is a concept which means selling a bouquet of brands under the same chain (example, Shoppers Stop selling Arrow, Flying Machine, Biba, Titan – all under the same roof) and has been rather controversial. Although states and union territories are free to choose whether to implement this prohibition or not, the protectionist sentiment in the government towards small retailers continues to affect this restriction.

FDI policy in Single-brand retail trade

Very recently, in January 2018, the government has permitted 100% FDI under automatic route in entities engaged in single-brand retail trading. This not only has the potential of improving the supply chain and access for brands but also limits the time, cost and filing procedure for foreign entities trying to enter the Indian market.

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Avani Mishra holds a bachelors degree in commerce with a specialisation in corporate affairs and administration.

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