Dec. 28, 2018

Union Ministry of Commerce announced new e-commerce rules to provide clarity on FDI policy on e-commerce sector.


Key Highlights of the rules:

The following decisions will take effect from 01 February, 2019 –

  • 100% FDI under automatic route is permitted in marketplace model of e-commerce. FDI is not permitted in inventory-based model of e-commerce.

  • E-commerce companies running marketplace platforms — such as Amazon and Flipkart — cannot sell products through companies, and of companies, in which they hold equity stake.

  • Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.

  • An e-commerce marketplace will not force any seller to sell any product exclusively on its platform.

  • To curb the practice of deep discounts, the government said they cannot directly or indirectly influence the price of goods and services.

  • E-commerce marketplace entity will be required to furnish a certificate along with a report of statutory auditor to RBI, confirming compliance of the guidelines, by September 30 every year for the preceding financial year.

  • All vendors on the e-commerce platform should be provided services in a “fair and non-discriminatory manner”. Services include fulfilment, logistics, warehousing, advertisement, payments, and financing among others.

Definitions acc. to Circular:

  • E-commerce- E-commerce means buying and selling of goods and services including digital products over digital & electronic network.

  • E-commerce entity- E-commerce entity means a company incorporated under the Companies Act 1956 or the Companies Act 2013.

  • Inventory based model of e-commerce- Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.

  • Marketplace based model of e-commerce- Marketplace based model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

Impact on e-commerce majors:

  • Under the rules, the suppliers will not be permitted to sell their products on the platform run by such marketplace entity. This will impact backend operations, as Group entities would have to be removed from the e-commerce value chain.

  • Also, e-commerce players like Amazon and Flipkart, who have their private labels, will not be able to sell them on their platforms if they hold equity in the company manufacturing them.

  • Industry experts say the changes will have a significant impact on the business model of e-commerce majors such as Amazon and Flipkart, as most of them source goods from sellers who are related party entities.

  • However, the language of the clarification seems to grant leeway, to a certain extent, to entities which are step-down subsidiaries of the entity in which the e-commerce entity or its group companies hold equity.

Impact on consumers and small retailers:

  • Consumers may no longer enjoy the deep discounts offered by retailers that have a close association with marketplace entities.

  • The absence of large retailers will, however, bring relief to small retailers selling on these platforms.

  • Traders running traditional brick-and-mortar stores, who now find it difficult to compete with the large e-commerce retailers with deep pockets, could gain.

Way ahead:

  • Industry experts while welcoming the decision to tighten FDI norms called for forming a regulatory authority to check flouting of e-commerce rules.

  • they have also asked the government to come with an e-commerce policy soon