On December 26, 2018, the Department of Industrial Policy & Promotion issued the Press Note 2 of 2018 (“Press Note”), pertaining to the review of the policy of foreign direct investment in e-commerce. 

The Press Note replaces paragraph 5.12.15.2 (E-commerce activities) of the Consolidated FDI Policy Circular, 2017, and has introduced inter alia the following key changes: 

Ownership or control over the inventory: 

E-commerce marketplace entities (“Marketplace Entities”) are prohibited from exercising ownership or control over the inventory. Inventory of a vendor will be deemed to be controlled by the Marketplace Entity if more than 25% (twenty five percent) of purchases of such vendor are from the Marketplace Entity or its group companies. Such ownership or control over the inventory will render the business of a Marketplace Entity into inventory based model. Any entity having control over its inventory by a Marketplace Entity or its group companies shall be prohibited from selling its products on any platform maintained by such Marketplace Entity. 

Equity participation restriction: 

Any entity which has equity participation by a Marketplace Entity or its group companies shall be prohibited from selling its products on any platform maintained by such Marketplace Entity. 

Arm’s length basis:

Marketplace Entities are permitted to provide certain services (such as warehousing, logistics, payment collection etc.) to the vendors on its platform. However, the Marketplace Entity is prohibited from directly or indirectly influencing the sale price of goods and services, and it should maintain a level playing field. Any such services provided by a Marketplace Entity (or any other entity in which the Marketplace Entity has direct or indirect equity participation or common control) to its vendors, shall be at arm’s length and in a fair and non discriminatory manner. Provision of services by a Marketplace Entity to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory. 

Exclusivity: 

A Marketplace Entity is prohibited from mandating any vendor to sell any product exclusively on the platform maintained by such Marketplace Entity. 

The changes proposed pursuant to the Press Note will be effective from February 1, 2019.