Foreign Direct Investments (FDI) in E-Commerce Sector in India: Lawyers Advice on Foreign Investments in India | | FDI Attorney in Delhi NCR | FDI Attorney in India | India Business Entry
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In a country like India where funds are not easily available, Foreign Direct Investment (FDI) helps the economy develop and act as a vital source of funds for companies wherein non-resident individuals or entities can invest money into India. Foreign Direct Investment (FDI) in India is mainly governed by the Department of Industrial Policy and Promotion (DIPP) and the laws relating to foreign exchange is controlled and managed by the Foreign Exchange Management Act (FEMA) of 1999. Foreign investment in the E-Commerce sector could be made possible even with the investor residing in his own country. But however, in order to comply with the Indian Laws certain guidelines must be followed by these investors.
The E-Commerce sector in India comprises of the following business models:
a) Inventory based model of E-Commerce
b) Marketplace model of E-Commerce
c) Hybrid model of inventory and marketplace model
A Foreign investor investing or starting a business in the E-Commerce sector of India, must keep in mind the necessary rules and regulations for the same:
1) FDI guidelines on E-Commerce sector issued by the Department of Industrial Policy and Promotion (DIPP) in 2018:
• 100% FDI is permitted in marketplace model under automatic route in E-Commerce and is not permitted in inventory-based model in E-Commerce.
• 100% FDI is permitted in Business to Business (B2B) E-Commerce and is not permitted in Business to Consumer (B2C) E-Commerce.
2) The Information Technology (IT) Act, 2000:
• In order to facilitate a paperless trading, the Information Technology (IT) Act, 2000 gives legal recognition to electronic records and electronic signatures, according to Section 4 and 5 of the Act.
• Section 72A of the IT Amendment Act, 2008 lays down the punishment for disclosing information in breach of a lawful contract.
• Information Technology (IT) Rules, 2000 ensures the security practices, procedures and sensitive personal data or information.
3) Indian Contracts Act, 1872
• The Contracts Act governs all valid e-contracts in India. Physical written contracts are not mandatory under the Act and the IT Act provides for the validity of contracts formed through electronic means under Section 10A of the IT Act.
4) Intellectual Properties (IP) Issues:
• The investors must ensure that all copyrights and trademarks must be secured by them and must also ensure other businesses Intellectual Properies (IP) is not infringed.
5) Competition issues:
• Price fixation arrangements between the seller and the entity, or anti-competitive agreements, sale agreements or other such agreements fall under the scope of the Competition Commission of India regulated by the Competition Act, 2002.
A foreign entity must take certain precaution with respect to the new FDI policy in India. Since several entities have a marketplace model as well as inventory-based model of E-Commerce, it may become difficult for them to operate under several business models and not avail benefits from them. In order to comply with the FDI guidelines, such entities may have to decide upon their business model and make certain changes with respect to changing their business model to marketplace business model in order to gain benefits of 100% FDI under the automatic route.
The new draft FDI policy has laid down that all E-Commerce businesses having websites and apps that can be downloaded in India must have a registered business entity in India as an importer or a registered entity through which all sales into India are transacted. Another important requirement for E-Commerce entities is that, they must publicly share all details of the seller who make their products available on the marketplace website. With the newly amended policy, the online entities may face difficulties in providing cheap discounts or reduced pricing on their products.
One way to ensure that foreign entities can continue to invest in India despite the FDI policy is Indirect Foreign Investment (IFI). Despite the recent FDI policy on E-Commerce, foreign investors can invest in India under Indirect Foreign Investment. This means that investment can be made indirectly through an intermediate Indian Company. If such intermediate Indian Company (that is either controlled or owned by foreigners) invests in another Indian Company it would be Indirect Foreign Investment (IFI) or Downstream Investment. Such investments must comply with the Foreign Exchange Management Act (FEMA) and the Securities and Exchange Board of India (SEBI) guidelines and must notify the Reserve Bank of India (RBI). For example, if X Ltd. an Indian E-Commerce platform, is owned or controlled by a foreign entity, and invests in another Indian Company, then such investment would be an Indirect Foreign Investment (IFI).
However, despite these changes, FDI helps transform the country’s economy in the E-Commerce sector and it is also expected to grow in the future. This change in the policy may be a temporary one but, it shall ensure that FDI continues to contribute as an important source of foreign investment for India. India being one of the biggest markets recognised for foreign investments has shown an exponential growth globally when it comes to FDI in the E-Commerce sector which will further continue to rise in the near future.
Important Links:
https://dipp.gov.in/sites/default/files/pn2_2018.pdf
https://dipp.gov.in/sites/default/files/DraftNational_ECommerce_Policy_23February2019.pdf
Authored By: Adv. Anant Sharma & Sameera Singal