Department of Industrial Policy and Promotion (‘DIPP’) under the Ministry of Commerce and Industry has issued Press Note 2 (2018 Series) dated 26th December, 2018 amending Consolidated FDI Policy circular, 2017 (‘Policy’) regarding the conditions to be adhered by e-commerce entities with foreign investment with effect from 1st February, 2019.
The key elements are as follows:
| S.N | New provisions | Effect |
| 1. | Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchase of such vendor are from marketplace entity or its group companies | By the introduction of deeming provision (i.e. if more than 25% purchase of one vendor are from e-commerce entity or its group companies, the inventory of such vendor be deemed to be controlled by e-commerce entity), the entire business will turn into inventory-based model, in which foreign direct investment is prohibited. Hence, the e-commerce entities or their group entities, which are indirectly selling through different vendors in order to avoid inventory-based model, shall restructure their arrangements. |
| 2. | An entity having equity participation by e-commerce marketplace entity or its group companies or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity |
The newly inserted provision expressly bars an entity from selling any products on the platform run by e-commerce entity in the following event:
Understanding with the help of an example: A → Entity selling the inventory B → E-commerce entity providing market place C → Group company of B Case 1: B holds equity shares in A or exercises control over A Selling of A’s products on B’s platform: Not permitted Case 2: C holds equity shares in A or exercises control over A Selling of A’s products on B’s platform: Not permitted This provision seeks to avoid any conflictof interest between the e-commerce entity and the vendors selling theproducts on such platform which may have an adverse effect on the end users. Any kind of equity participation is completely restricted. |
| 3. | Services should be provided by e-commerce marketplace entity or other entities in which e-commerce entity has direct or indirect equity participation or control, to vendors on the platform at arm’s length and in a fair and non- discriminatory manner. Such services will include but not limited to fulfillment, logistics, warehousing, advertisement, marketing, payments, financing etc. Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purpose of this clause, provision of services to any vendor on such terms which are not available to other vendors in similar circumstances will be deemed unfair and discriminatory. |
The services provided by an e-commerce marketplace entity or other entities in which e-commerce entity has direct or indirect equity participation or control to the vendors should be on arm length basis and in a fair and non-discriminatory manner. This provision provides for fair and equal treatment to all vendors by an e-commerce entity. Earlier, e-commerce entities used to get into arrangement with vendors for providing the services by charging heavy prices or by offering privileged treatment, however, the small and medium traders were left unaided on the giant platforms. With the prologue of this provision, the environment of better and fair competition shall prevail on the online marketplace. Further, even the cash back by group companies of the e-commerce entity to the buyers shall be fair and non-discriminatory. For example cashback offered by Phone-pe app, which is launched by Flipkart, to customers of Flipkart, will now also be regulated. |
| 4. | E-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only | The internal deals executed between the e-commerce entity and the vendors, prohibiting the latter to sell their products elsewhere have now been legally done away with. For example arrangement between Amazon and One-Plus mobile for exclusive sale , can no longer exist. |
| 5. | E-commerce marketplace entity will be required to furnish a certificate along with a report of statutory auditor to Reserve Bank of India, confirming the compliance of above guidelines, by 30th September of every year for the preceding financial year | This newly inserted provision requires an e-commerce entity to undertake certain reporting requirements regarding the compliances of the guidelines issued in this respect on annual basis by 30th September. This requirement will facilitate the apex authority to effectively and closely monitor the e-commerce sector. |