EXPLAINED: FDI Policy in E-commerce Activities

The e-commerce market has grown manyfold and continues to flourish with several startups
providing with innovative market platform for not only selling goods and services but also offering
digital solutions. The Indian e-commerce landscape has witnessed a monumental shift with the
introduction of the Foreign Direct Investment (FDI) policy in 2020. This policy aimed to bring about
a more structured and regulated framework for foreign investments in the e-commerce sector. The
2020 FDI policy introduced several crucial amendments to the existing regulations governing e-
commerce in India. Some of the salient points include:
 Such FDI e-commerce entities can engage only in business to business (B2B) e-commerce
and not in business to consumer (B2C) e-commerce.
 FDI upto 100% FDI is allowed via automatic route in the marketplace model of e-
commerce only, where platforms act as intermediaries connecting buyers and sellers.
 FDI in inventory-based e-commerce, where platforms hold inventory of vendor and seller
and directly sell products to customers, remained restricted.
 FDI-funded e-commerce platforms are prohibited from exercising ownership or control
over the inventory. They can only provide a platform for third-party vendors. Inventory
vendor is deemed to be controlled by e-commerce entity if more than 25% of purchases of
such vendor are from e-commerce entity or its group entities.
 Platforms are restricted from entering into agreements with sellers that could lead to the
creation of an exclusive sales channel.
 E-commerce entities were prohibited from influencing the prices of products sold on their
platforms.

Impact of the 2020 FDI Policy
 The policy aimed to create a level playing field for both domestic and international players.
By limiting control of market place entity over inventory and pricing, the policy sought to
prevent large e-commerce players from having undue influence over the market.
 The 2020 policy was welcomed by local retailers and SMES.
 The prohibition on control over pricing and requirements related to disclosure of seller
details and warranties/ guarantee requirement aimed at safeguarding consumer interest.
 The 2020 FDI policy led to a revaluation of business models for many e-commerce entities.
Many e-commerce platforms restructured their operations to comply with the new
guidelines.

 Entities having equity investment from e-commerce entity or its group concerns or having
control on its inventory is not permitted to sell its product on platform of such e-commerce
entity.
 Support and fulfilment services are permitted to be provided by a e-commerce market
place to sellers.
 Warranties/ guarantee are to be provided by sellers.
 Seller details including name, contact details and address of seller are mandatory.
 Guidelines for wholesale and cash and carry wholesale trading are also applicable.

The 2020 FDI policy marked a significant milestone in India's e-commerce journey and set the
stage for a more regulated and structured e-commerce market in India. Given that the growth
potential of digital economy is tremendous, it aims to strike a balance between promoting foreign
investment and protecting the interests of domestic businesses. Measures to ensure fair
competition and consumer protection laid the foundation for a more inclusive and transparent e-
commerce market. Stakeholders in the e-commerce segment should be cognizant of the
requirements of the FDI Policy and have appropriate structures and work-flows in place which are
FDI Policy compliant.

(This Article is solely for information purposes, does not constitute legal or professional advisory and should not be relied upon or used as a substitute for legal advice from attorney.)
About the Authors:

Jayshree Navin Chandra, Senior Partner at ZEUS Law, has been a practicing lawyer since 2001 with extensive corporate and transactional advisory experience. She advises and
represents clients ranging from Fortune 500 companies to start-ups as well as Central and State
Government departments and public bodies in a wide range of domestic and cross border
transactions, across industries in practice areas including Corporate and Company Law, M&A and Joint Venture, Private Equity, FDI & FII, Real Estate and Infrastructure, Data privacy and protection, Intellectual Property & Commercial Law Advisory.
Sangini Tyagi, is a Senior Associate at ZEUS Law and works in the Corporate & Commercial and
Infrastructure & Real Estate practice vertical.
ZEUS Law Associates is an ISO certified full service law firm with a team of dedicated and
experienced lawyers well versed in domestic and cross border transactions across sectors,
jurisdictions and regulatory landscapes along with handling and advising brand protection
formalities and strategies across India and international borders. The firm’s practice areas include
Intellectual Property Corporate and Company Law, M&A and Joint Venture, Private Equity, FDI & FII, Real Estate and Infrastructure, Intellectual Property & Commercial Law, Litigation, Alternate Dispute Resolution, Indirect Tax and NRI Services.