E-commerce is a system that offers a marketplace for suppliers and customers to buy and sell goods. Currently, a number of online retailers such as Amazon, Myntra, Flipkart, etc. operate. E-commerce is a field that is expanding and has connected the entire world. E-commerce is always thriving, even in India. Although the proportion of retail transaction conducted through e-commerce platforms is still extremely small, it is growing quickly.
As a result, international investors are considering e-commerce organisations as new businesses in which to deposit their money. To find out if investing in these firms falls under an automatic approval route or whether prior clearance from the RBI or the Central Government is necessary, investors must first check the FDI guidelines.
The Department for Promotion of Industry and Internal Trade’s Consolidated FDI Policy contains comprehensive provisions relating to foreign direct investment. This article goes into great length on FDI in e-commerce firms and the associated terms and circumstances.
1. An explanation of online shopping and online businesses
E-commerce is the term used to describe the buying and selling of things, especially digital ones, using digital and electronic networks. UrbanClap, Upwork, and other e-commerce sites offer services in addition to commodities.
E-commerce businesses
A firm formed under the Companies Act, 1956 or 2013, a foreign company covered by the Companies Act, 2013, or an office, branch, or agency in India owned or controlled by a person residing outside of India are all considered to be e-commerce entities.
2. E-business models
Consolidated FDI policies talk on the two e-commerce business models below:
Inventory-based e-commerce model: When an e-commerce firm owns the inventory of goods and services and sells them directly to customers, that is known as an inventory-based model of e-commerce.
Consequently, under this approach, an online retailer purchases goods, stocks them, and then sells them straight to clients. The entire logistic is handled by e-commerce operators. The corporation bears the profit and loss from product sales and purchases.
A model based on inventory is used by Alibaba.
Market-based e-commerce model:
Providing an information technology platform on a digital and electronic network by an e-commerce firm to function as a facilitator between buyer and seller is known as the marketplace based model of e-commerce.
In such a model, the merchant sells his goods directly to the buyer, and the e-commerce platform receives a commission as well as fees for warehousing, shipping, and other services. The vendor, not the e-commerce provider, is the one who makes money or loses money on the sale of items.
The majority of well-known e-commerce companies in India operate according to a market-based approach.
3. FDI acceptable in e-commerce entities
4. Requirements for FDI into e-commerce entities
100% The following terms and conditions apply to the automatic route of approval for FDI:
In the inventory-based e-commerce paradigm, FDI is prohibited.
Businesses involved in e-commerce would only conduct Business to Business (B2B) transactions and not Business to Consumer (B2C) transactions. This means that the e-commerce company will be able to conduct B2B transactions with merchants who have registered on its platform.
Networks of computers, television channels, and any other internet application used automatically, such as web pages, extranets, mobile devices, etc., are all considered to be digital and electronic networks.
In terms of warehousing, shipping, order fulfilment, call centres, payment collection, and other services, e-commerce businesses may offer support services to sellers.
The inventory, or commodities ostensibly for sale, will not be under the ownership or control of e-commerce entities using a marketplace-based approach. The business will become an inventory-based model if it has such ownership or control over the inventory. Additionally, if an e-commerce firm or one of its group entities accounts for more than 25% of a vendor’s purchases, the vendor’s inventory will be considered to be under its control.
The following organisations are prohibited from selling their goods on a website managed by an e-commerce marketplace organisation:
a company in which such an e-commerce corporation or one of its group companies holds equity; or
a company whose inventory is under the management of an online marketplace or one of its affiliate companies.
Organizations won’t be able to offer their products on the website operated by these e-commerce companies.
The name, address, and other contact information of the vendor should be made very obvious when selling goods or services electronically under the marketplace model. The seller is accountable for all post-sale services, delivering the goods to clients, and ensuring customer satisfaction. When a customer clicks on the product details, the Amazon platform clearly displays the name and other information about the vendor. Also, the invoice that was received with the package was generated by the vendor, not Amazon.
In the marketplace model, the e-commerce business may facilitate payments for sales in accordance with the Reserve Bank of India’s requirements.
In the marketplace model, as items are sold by the seller, the seller is responsible for any warranty or guarantee of the goods and services sold. Entities engaged in e-commerce just enable auxiliary services.
E-commerce providers of marketplaces must maintain a level playing field and refrain from having an impact on how much products or services are sold. The vendor alone determines the purchase price.
An e-commerce marketplace business, or other entities in whom the e-commerce marketplace entity has direct or indirect equity participation or common control, should offer services to platform vendors at arm’s length, fairly, and without discrimination. These services may include payment processing, fulfilment, logistics, warehousing, marketing and advertising, and financing.
Furthermore, group firms of marketplace organisations must treat customers fairly and without discrimination when offering cashback and other rewards. The provision of services to any vendor on such conditions that are not made available to other vendors in comparable circumstances will be deemed unfair and discriminatory for the purposes of this article.
E-commerce marketplace organisations won’t compel any sellers to sell only on their platform.
For each financial year, e-commerce marketplace businesses with FDI are required to receive and keep on file a report from the statutory auditor attesting to conformity with the rules for e-commerce by September 30 of the following year.
The selling of services through e-commerce shall follow an automated route, subject to the terms of the FDI policy on the services sector and applicable laws/regulations, security, and other conditionalities.
5. E-commerce wholesale trading entities’ FDI policy
Selling products or services at wholesale implies doing so to merchants, business users in the commercial, industrial, institutional, and professional sectors, as well as subordinate service providers. It suggests sales made for commercial, professional, or other purposes rather than for personal use.
The following wholesale trade (WT) guidelines for cash and carry apply to business-to-business (B2B) e-commerce:
In accordance with the pertinent Acts, Regulations, Rules, and Orders, the necessary licences, registrations, and permits must be obtained before engaging in WT.
Sales made by the wholesaler would only be regarded as “cash & carry wholesale trading” or “wholesale trading” with legitimate business customers, with the exception of sales to the government:
Entities holding the necessary tax registration; Entities holding trade licences, such as a Shops and Establishment Act licence or registration issued by a government agency indicating that the entity or person holding the licence or registration is actively engaged in a commercial activity; Entities holding permits/licenses, etc., for conducting retail trade (such as tehbazari and similar licences for hawkers),
An entity to whom WT is made may satisfy any one of the four aforementioned requirements.
On a daily basis, complete records containing all the information regarding these sales, such as the name of the entity, the kind of entity, the registration number, the amount of sale, etc., should be kept.
Transfer of goods would be allowed between businesses in the same group. Such WT to group firms, however, should not account more more than 25% of the wholesale venture’s overall turnover.
WT can be carried out according to customary business procedures, including extending credit facilities in accordance with applicable laws.
Retail trading is permitted for wholesale/cash & carry traders under the corresponding restrictions. A company that does both wholesale/cash and carry business and retail business is required to have separate books of accounts for these two divisions of the firm, which must also be properly audited by statutory auditors. Both the wholesale/cash and carry business and the retail sector must independently adhere to the requirements of the FDI policy.
