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India Grants Restricted Approval for 100% FDI in E-commerce

India’s new rules on foreign direct investment (FDI) in e-commerce have been welcomed as a long-overdue attempt to regulate one of the country’s fastest growing sectors. They have, however, also raised a question mark over the legitimacy of a number of the leading players in the Indian online sales market, notably Amazon and Flipkart.

Under the new regulations, 100% FDI is to be officially permitted in the sector for the first time. The standing of such investments had previously been unclear, with 100% FDI supposedly forbidden in the retail sector – a ruling that had been enforced on bricks and mortar operators, but seemingly flouted by online companies. This seemingly unfair arrangement had spurred legal action by a number of conventional retailers, a move that, in part at least, spurred this new legislation.

Whilst allowing 100% FDI, the new legislation comes with a number of restrictions. Such investment is only to be permitted for those e-commerce operators that function as marketplaces, providing a platform between multiple buyers and sellers. Additionally, no more than 25% of the sales on such platforms can be derived from a single vendor or a subsidiary business of the operator, requirements that both Amazon and Flipkart might struggle to meet.  Marketplace operators are also forbidden from setting prices or offering discounts, a practice favoured by both Amazon and Flipkart as a means of wooing potential customers.

In the case of e-commerce sites where the operators own all of the goods on sale – the so called “inventory” model - 100% FDI is not permitted.  In the latter case, though, exceptions will be made if the operator also has bricks and mortar stores in India and manufactures at least 70% of its products in-house.

E-commerce has enjoyed rapid growth in India in recent years. In 2015, Indian consumers spent some US$11 billion on-line, with the figure expected to exceed $100 billion by 2020. Announced by India’s Department of Industrial Policy and Promotion (DIPP), the new rules governing the sector have come into immediate effect.

Content provided by Picture: HKTDC Research
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