Mar 14,2019 | 20 min read

Revised FDI policy on e-commerce: Ensuring Fair Play?

Revised FDI policy on e-commerce: Ensuring Fair Play?

Authors: Madhavan Srivatsan / Tuhin Batra Law Office of Madhavan Srivatsan

“It is the spirit and not the form of law that keeps justice alive.” ― Earl Warren

The recently revised FDI policy on e-commerce as introduced by the Government vide Press note no. 2 of 2018, has introduced new conditions and restrictions upon e-commerce marketplace entities (EMEs). The revised policy was required to be complied by EMEs before 1st February 2019.

There are few interesting changes to be noted in the revised policy, both in terms of addition and deletions from the previous policy (i.e. the policy which was in effect prior to PN2 of 2018). It becomes debatable as to whether EMEs with deep pockets have been provided an ease of doing business or whether they are placed under restrictions in the revised policy. In other words, whether the “brick and mortar” stores which are otherwise placed under strict FDI rules have been benefitted or not under the revised policy and whether a level playing field has been provided to them with big entities. Let`s delve a little deeper into these issues and examine them.

Firstly, the earlier restriction on EMEs not to have more than 25% of their total annual sales resulting from a single vendor, has been done away with. It is not clear as to what is the principal reason behind removal of this condition. In order to deal with this condition, an EME required atleast four or more vendors registered on its platform to collectively contribute 100% sales on its platform. Now, as this condition has been done away with, it raises a debate as to whether one or couple of vendors registered with any EME can contribute upto 100% of the sales effected on the platform of EME.

Secondly, the revised policy has introduced a new condition which restricts EMEs or any of their group companies to have equity participation in any of the vendor entity registered on their platform and which is purporting to sell its inventory on such platform of EMEs. However, if any EME (through its group company) is still holding indirect equity in the seller, through another company in between, which is registered on the platform, then this raises yet another question as to whether the revised policy prohibits only direct shareholding or indirect shareholding as well. It is not uncommon to structure foreign investments in India through more than one layer of investment.

Thirdly, another condition which has been introduced in the revised policy states that, inventory of a vendor will be deemed to be controlled by EME if more than 25% (twenty five percent) purchases of such vendor are from the EME or its group companies, and therefore the said inventory cannot be sold on the platform of EME or its group companies. As per media reports, EMEs are now trying to be fully compliant with the revised policy as they have reduced their equity shareholding in the joint venture between their parent companies and the vendor entities, to below 26%, and as such the vendors are no longer ‘group companies’ of such EMEs. However, it will be interesting to note that, on account of such reduction of shareholding, would big market entities want to give up on the control element as well, which is often exercised in such deals by way of complicated shareholders' agreements and side letters. In foreign investment deals, merely because a foreign entity is holding percentage shareholding which is less than as required to be qualified as a group company, does not necessarily mean that such foreign investor has given up its right to control the target. It may still exercise control indirectly through various rights in the shareholders' agreement. Thus, it would be interesting to see whether the restructuring of EMEs will survive the restrictions under the revised policy.

As per the revised policy, if the EME is exercising control over the inventory of the vendor by way of 25% purchase rule as mentioned or is holding equity in the vendor registered on its platform, it will render the vendor and its inventory “deemed to be owned and/or controlled by such EME” and thus the business model of such EME would be considered to be an inventory-based model of e-commerce, in which FDI is totally prohibited. The rationale behind this restriction is to ensure that, any foreign entity intending to own and operate an “e-commerce platform” does not exercise any influence or control over the vendors registered on its platform and acts exclusively as “market place”. In light of what has been discussed above, is it really possible?

Keeping in the mind, the interest and welfare of all the stakeholders in this industry, what is required to be seen is, whether the policy makers should be looking at “compliance in form” or “compliance in spirit” because the EMEs may, still continue to hold indirect equity holding in the vendor entities, and/or exercise control over vendor registered on its platform by way of shareholders’ agreement, and/or there may be only very few large vendors registered on the EME platform as the restriction to have not more than 25% sales from one vendor on the EME platform has been removed. More such intriguing questions are yet to be answered by the policy makers.

The contents of this Article are the original work and intellectual property of the authors as mentioned above. Any publication of this Article in any form will not be deemed to grant any exclusive rights in favour of any entity publishing the same. By submitting the said article for publication, we do not relinquish and/or assign the copyright to you or the publication/name of the company or to any of its subsidiaries or associates.

Need Free Legal Advice or Assistance Online?

For any Foreign Investment related matter, please Post Your Requirement anonymously and get free proposals OR find the Best Foreign Investment Lawyers and book a free appointment directly.


Caution - Guarantor Wears Hat Of Borrower by Advocate Nitin Jain

What Taxation Laws Should All Employees Be Aware Of?

What is the Legal Status of Bitcoin in India?

What is The Legal Process of Taking Investment As A Startup?

How to Protect Your Business from Cybercrime?

How Adoption Laws Work in India

The Basics of Equity, Stakes & Shares That Every Startup Entrepreneurs Should Know

Different Types of Investments Available to Startups

Lesser Known Laws in India


Madhavan Srivatsan

"Law Office of Madhavan Srivatsan (“Law Office”) is a boutique law office specializing in corporate laws in the fields of Mergers & Acquisitions, Private Equity, Joint Ventures, Commercial Contracts, Corporate Advisory and commercial litigation strategizing. The Law Office has been advising start-up entities and their founders and mid-sized companies in selected areas of corporate laws as mentioned above. The main aim of the Law Office is to offer quality services in select domain and works on