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Legal Compliance for Foreign Companies for running Dropshipping Business in India

 > Corporate Lawyer  > Legal Compliance for Foreign Companies for running Dropshipping Business in India

Legal Compliance for Foreign Companies for running Dropshipping Business in India

Dropshipping is a type of business platform which connects the buyers and sellers. This is a platform where the retailer does not keep the goods in stock but transfers the orders to either a manufacturer or another retailer who then delivers the products directly to the customers. This platform is still in the growing stage in India. Some of the Indian dropshipping platforms are TradeIndia, IndiaMart, Coorgle Dropshipping, etc. Since this platform of business is emerging all around the world a question arises if a foreign company can do dropshipping business in India.

Foreign Companies doing Dropshipping in India:
For any Foreign Company to do business in India, it has to perform some due diligence on aspects like assessment of the total market, the potential buyers and target market, knowledge about the competition, pricing and product mix, entry options, regulations, and most importantly, the implementation of the business strategy.

When a foreign company is entering India to do business, it comes as Foreign Direct Investment (FDI). In this process, the government in order to protect the local businesses sets some restrictions on the FDI entering India. This is the FDI policy. There are two routes though which a foreign company can enter India to do business as per the FDI policy- Automatic route and the Government route. Through the automatic route, the foreign company can carry out business up to 100% in the sectors which do not require prior approval from the government or the Reserve Bank of India. Whereas, in the government sector, the foreign companies will require the prior approval from the Government to carry out business in the permitted sectors in India. The government of India also prescribes a Sectoral Cap which consists of the maximum ceiling of capital a foreign investor can invest in a particular sector.

When it comes to E-Commerce in India by a foreign company, two types of models exist- Market place and Inventory. The market place model is defined as a platform which only connects the buyers and sellers. In India, 100 per cent FDI is allowed in this market place model. But on the other hand, FDI in the inventory model is not allowed in India as per the FDI policy of India. Inventory model is defined as one where the E-Commerce platform starts owning the products being sold. This has been restricted in India.

In its recent guidelines, India has temporarily banned the entry of FDI from its bordering countries through the automatic route. It is allowing FDI only though the government route in which prior government permit is required. This is because in the prevailing covid-19 situation and the national lockdown, a lot of Indian business and corporates are affected to such an extent that they are now attractive for takeovers. In such a situation the government cannot let the foreign companies rake control of the Indian corporate. Hence, any country that shares the land border of India will need approval from the Government of India before entering India with FDI. This applies to dropshipping as well from these countries.

Foreign companies like Amazon and Flipkart which are US based can have an inventory model in their country but when these companies are doing business in India, they cannot set up their model in India. They can only operate in the market place model in India. The marketplace model which only connects the buyers and sellers is exactly what dropshipping is. Dropshipping is an E-Commerce platform which connects the buyers and sellers and it operates in a way where a third party stores the inventory and distributes the products when the orders from the customers come in. So what foreign companies like Amazon and Flipkart are doing in India is dropshipping and this method is permitted and allowed as per the FDI policy of India.
Now apart from the FDI policy of India, there are certain legal rules and regulations that the foreign dropshipping companies must comply with.

Legal Compliance for Foreign Companies
For a foreign company to do dropshipping business in India, it has to take care of a lot of aspects. The company should have knowledge of the Indian laws and also know what products they are allowed to or not allowed to sell in India. There are a lot of regulations they should look at before operating a dropshipping business in India.

  1. The first and the foremost step every E-Commerce company must take is Registration of the Company. The first most important aspect that an E-Commerce business or in this case a dropshipping business must take into consideration is Registration of the Company. It can register itself as any of the following entities:
    a) A private or a public limited company,
    b) A sole proprietorship,
    c) A cooperative,
    d) And a limited liability partnership.
    Further, every business must also have a license to support its practices. For a dropshipping business not many licenses are required compared to other businesses. However, some of the licenses it must obtain are
    a) Name Approval for the Company incorporation,
    b) Goods & Services Tax (GST) registration
    c) Permanent Account Number (PAN)
    d) Tax Deduction & Collection Account Number (TAN)
    e) Director Identification Number,
    f) Trade license.
  2. Section 2(h) of the Indian Contract Act, 1872 read with section 10A of the Information Technology Act, 2000 which talk about the Validity of an e-Contract is a quintessential aspect that an e-business must comply with. Under these act, the rules regarding the communication, acceptance of proposals, and contract formation between customers should be complied with. Moreover, the terms of service, privacy policy, and return policies should be laid down on the E-Commerce websites to make the agreements legally binding. This is a very general rule which every E-Commerce entity must comply with irrespective of the fact that the entity is FDI or not.
  3. Data protection of the customers is another major aspect that the E-Commerce entity must comply with. The rules under Information Technology Rules, 2011 should be complied with. These rules prescribe regulations relating to the kind of content which should be displayed on the website with respect to aspects like defamation. Section 79 of the Information Technology Act, 2000 states that an intermediary shall not be liable for any third party information, data, or communication link made available or hasted by him. Adding to this, Section 43 of the information Technology Act, 2000 talks about the penalties and compensations for any kind of mishandling of private information in E-Commerce.
  4. Payment and Settlements Systems Act, 2007 defines what a payment system is and it provides for regulation and supervision of payment systems in India. An E-Commerce entity has to ensure that it qualifies the payment system as defines under this act and further comply with the provisions under it. The Reserve Bank of India has also envisaged some regulations which are also to be complied with by the E-Commerce entity.
  5. The foreign company carrying out E-Commerce in India shall also submit a FDI Policy Compliance Report to the Government annually. This is a recent step taken by the Government.

These are the legal compliance for foreign dropshipping companies to do business in India. Every foreign company seeking to do a dropshipping business in India must take care of these rules and regulations for the smooth happening of transactions.
Authored By: Adv. Anant Sharma & Sanjana Akasam

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