Long and short of e-commerce foreign investment rules

E-commerce in India has grown at a phenomenal pace, successfully changing the way people transact. The Digital India initiative by the government has helped expand the e-commerce sector in India across services ranging from ordering food, online streaming, buying groceries and making hotel reservations. The legislative regime on e-commerce has also grown at an equally phenomenal pace in the last two decades.

The government permitted 100% foreign direct investment (FDI) in India in the e-commerce sector through automatic route, for the first time in 2000 for purely business-to-business (B2B) e-commerce activities with certain conditions. The norms pertaining to FDI in the e-commerce sector have undergone many changes over the years with the government defining e-commerce activities to mean the activity of buying and selling through an e-commerce platform. In 2015, the government permitted single-brand retail trading entities (operating through brick-and-mortar stores) to undertake e-commerce activities.

In 2016, the FDI policy redefined e-commerce as buying and selling of goods and services, including digital products, over digital and electronic networks. This definition is so broad that it arguably applies to all web services, including food delivery, video and music streaming, ride sharing and other over-the-top services, in addition to conventional retail marketplaces for utilities, fashion and lifestyle. The policy distinguished between inventory-based (where inventory is owned by the e-commerce entity and is sold directly to consumers) and marketplace-based models of e-commerce (where the e-commerce entity acts as a facilitator or a marketplace for sale between seller and end-consumer and does not own the products or services sold). While the policy permitted FDI up to 100% under the automatic route in the marketplace model, FDI in an inventory-based model was prohibited.

Kanchan Sinha is a partner and Sanya Parmar is a senior associate at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.