FDI Policy: Flipkart, Amazon, Cloudtail, PayTM

Foreign Direct Investment (FDI) in Ecommerce
Current & Proposed  
As of now, the Consolidated FDI Policy 2017 (FDI Policy) permits 100% foreign direct investment (FDI) under the automatic route in the marketplace model, subject to certain conditions. However, FDI is still not permitted in the inventory based model of e-commerce, i.e., B2C. The government has now amended paragraph (e-commerce activities) of the FDI Policy through vide Press note no. 2 (2018 series) on December 26, 2018 (PN 2) with effect from February 01, 2019.
While the government has maintained that the PN 2 is more clarificatory in nature than a new regulation by itself, PN 2 introduces a slew of conditions for receiving FDI in e-commerce activities under the automatic route:

(a) Ownership or control over inventory by the provider of the marketplace platform;
(b) Equity participation by the provider of the marketplace platform in the sellers that are selling on such platform;
(c) Fair and non-discriminatory practices by the marketplace platform with sellers; and
(d) Exclusivity arrangements between such platform and sellers.
We have briefly discussed each of these points below:
(a) Ownership or control over inventory: Previously, an e-commerce entity engaged in the marketplace business model was not allowed to exercise any ownership over the inventory. Any amount of ownership over the inventory implied that the marketplace entity shall be deemed to operate as an inventory based e-commerce model. The marketplace entities were further restricted from permitting total sales value on its marketplace from a single seller or such seller’s group companies exceeding 25% of such marketplace’s total sales value in a financial year.
As per PN 2, ‘ownership’ as well as ‘control’ over the inventory of the sellers by a marketplace entity shall now be the litmus test to distinguish between a marketplace model of e-commerce and an inventory-based model of e-commerce. While ‘control’ has not been defined, the test for determining whether ‘control’ has been triggered is whether more than 25% of the purchases of a vendor are made through the marketplace entity or its group companies. The restriction of not permitting more than 25% sales by a single vendor has been removed.
(b) Equity participation: Currently, marketplace entities can own the equity of any seller operating on its marketplace platform. As per PN 2, the sellers shall not be allowed to sell their products on platforms run by a marketplace entity if such marketplace entity or its group companies have equity participation in the sellers or control over the inventory.
These changes introduced by PN 2 will impact those marketplace entities that use one or more of their group companies to sell their products on the platform operated by such marketplace entity (for eg., Amazon’s stake in Cloudtail). While sellers and marketplace entities explore ways to restructure their businesses to align with the new policy, consumers may face the brunt.  PN 2 has also introduced the ambiguous term ‘equity participation’ as a result of which if a marketplace entity or its group companies have any ‘equity participation’ in a seller company, such seller shall not be permitted to sell goods on the platform run by such entity. With the increasing growth of private labels driving sales on e-commerce platforms, it appears that this may act as a dampener on such arrangements moving forward.
(c) Fair and non-discriminatory practices: Prior to PN 2, marketplace entities were prohibited from directly or indirectly influencing the sale prices of goods or services and required to maintain a level playing field.
The changes introduced by PN 2 are as follows:
  • Services such as logistics, warehousing, advertisement/marketing, payments, financing, etc. may be provided to the vendors who operate on the marketplace entity’s platform at arm’s length basis and in a fair and non-discriminatory manner by (a) marketplace entities, or (b) other entities in which marketplace entities have a direct/indirect equity participation or common control.
  • “Unfair” and “discriminatory” have been defined as provision of services to any vendor on such terms and conditions that have not been made available to other vendors in similar circumstances.
  • The cash back provided to buyers by group companies of a marketplace entity shall be fair and non-discriminatory.
These changes are intended to enable small vendors to compete with their larger counterparts as now all vendors have to be treated in a fair and non-discriminatory manner by the marketplace entities. Consumers may no longer enjoy the lucrative cash back offers that they were pampered with thus far. However, it is not clear as to what will constitute “similar circumstances” and this could be open to all kinds of interpretation by the regulators.
(d) Exclusivity arrangements: Marketplace entities shall also be prohibited from requiring sellers to sell their products exclusively on their platforms.
PN 2 merely states that a marketplace entity ‘shall not mandate’ any vendor to sell any or all of its products exclusively on its platform. This can be viewed as being a restriction only if such exclusivity is being imposed by the marketplace entity. It does not appear to prohibit a vendor from voluntarily selling exclusively on the platform as such.
Submission of certificate to Reserve Bank of India
Marketplace entities shall be required to submit a compliance certificate to the RBI along with the report of its statutory auditor by September 30th every year.