By Nishtha Mehta & Karen Issac
In March 2016, the Government of India first permitted 100% Foreign Direct Investment (FDI) under automatic route subject to compliance with certain conditions in the “marketplace model of e-commerce activities” by way of Press Note 3 of 2016 (Press Note 2016). This move of the Government clarified its position on FDI in marketplace model of e-commerce, which was till then an ambiguous sector from an FDI perspective.
Thereafter on December 26, 2018, the Department of Industrial and Policy and Promotion issued Press Note 2 of 2018 (Press Note 2018), with the objective of reiterating the Government’s stand on FDI in B2C e-commerce and in order to promote consumer interest by ensuring fair, competitive and transparent business practices.
The Government has revised the framework of FDI in e-commerce as set out in Press Note 2016 by imposing through Press Note 2018, certain prohibitions and restrictions on the e-commerce marketplace entities and the vendors, selling products on the e-commerce platform.
Considering that the Press Note 2018 was to be made effective from February 1 2019, certain e-commerce marketplace operators including Amazon and Flipkart had requested the Government to extend the aforesaid timeline to enable them to revamp their existing operations for ensuring compliance with the Press Note 2018. However, the deadline for the Press Note 2018 to come into effect was not extended and it became effective from February 1, 2019.
The salient amendments introduced by Press Note 2018 are set out below
Exercising control on inventory: Press Note 2016 prohibited marketplace entities having FDI from exercising ownership on the vendor’s inventory that was being sold on the e-commerce platforms. However, on and from February 1, 2019, marketplace entities are prohibited from exercising even ‘control’ (besides ownership) over such vendor’s inventory. An e-commerce entity would be deemed to have control of the vendor’s inventory if more than 25% of purchases of such vendor are from the e-commerce entity or its group companies.
Equity Participation: An entity (read vendor) is restricted from selling its products on the e-commerce platform of a marketplace entity if such marketplace entity has or its group companies have equity participation in that entity, or the marketplace entity has control over such vendor entity’s inventory. While Press Note 2018 provides a threshold of 25% for ascertaining control on inventory, it does not provide a percentage threshold of equity stake or interest that the marketplace entity should hold in the vendor entity.
Fair and Non-discriminatory services: Press Note 2018 mandates the marketplace entity to provide fair and non-discriminatory services including warehousing, logistics, marketing, financing etc. to all its vendors. An e-commerce marketplace entity or any other entity in which the e-commerce marketplace entity has direct or indirect equity participation or common control, is required to provide to the vendor, the aforesaid services on arm’s length basis and without any discrimination.
Exclusive arrangement: An e-commerce marketplace entity is not permitted to require any vendor to sell products on an exclusive basis through its platform.
Implications of new e-commerce policy on SME’s
While Press Note 2018 would have a far reaching effect on the functioning and operations of the bigger marketplace operators like Amazon and Flipkart, even, small, micro and medium enterprises, selling their products on the e-commerce platform of such marketplace entities (SME vendors), may have to tackle a few challenges arising therefrom.
SME Vendors which have an equity participation from marketplace entities or whose inventory is controlled by any marketplace entity (i.e. more than 25% of the purchases of the SME Vendor are by the marketplace entity or its group companies) cannot sell products on the e-commerce platform of such marketplace entities.
Accordingly, such SME Vendors may have to revisit their shareholding structure and also their sales strategies for sales of their inventories on e-commerce platforms so to be able to resume sale/continue to sell their products on the e-commerce platforms in a manner which is in compliance with the requirements of Press Note 2018. Further, considering that the Press Note 2018 does not provide a percentage threshold for equity stake or interest that the marketplace entity should have in the vendor entity, SME Vendors having even a miniscule equity holding of a marketplace entity would become ineligible to sell their products on the e-commerce platform.
Another condition in Press Note 2018 is prohibition on the marketplace entities to mandate any seller to sell products exclusively on its platform. Although, Press Note 2018 does not impose a corresponding restriction on the seller to not exclusively sell all of its products on the e-commerce platform.
Benefits to Small Retailers and Sellers
There are a few takeaways for SME Vendors from Press Note 2018. Prior to the introduction of Press Note 2018, the balance tilted perhaps in favour of entities in which marketplace entities had direct/indirect participation in the provision of services including warehousing, logistics, marketing and financing. However, the marketplace entities are now required to provide similar services to all its vendors including the SME Vendors. This will ensure an equal opportunity to all vendors to participate on the e-commerce platform more particularly the SME Vendors who don’t have access to proper infrastructure or are unable to afford incurring expenses on marketing and advertising and other logistics related services in respective of their products.
The prohibition on the marketplace entity to mandate a seller from selling any product exclusively on the e-commerce platform will encourage in creating a healthy competitive environment for all vendors on e-commerce platforms and consequently result in overall enhancement in type and quality of products available on e-commerce platforms and also the choices thereof for the end customers.
Nishtha Mehta & Karen Issac are Associate at Rajani Associates.