FDI in E-commerce business in India: A study

What is FDI

According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a
lasting interest by a resident entity of one economy (direct investor) in an enterprise that is
resident in another economy (the direct investment enterprise). The “lasting interest” implies
the existence of a long-term relationship between the direct investor and the direct investment
enterprise and a significant degree of influence on the management of the latter. Direct
investment involves both the initial transaction establishing the relationship between the
investor and the enterprise and all subsequent capital transactions between them and among
affiliated enterprises4, both incorporated and unincorporated. It should be noted that capital
transactions which do not give rise to any settlement, e.g. an interchange of shares among
affiliated companies, must also be recorded in the Balance of Payments and in the IIP.

A direct investor may be an individual, an incorporated or unincorporated private or public

enterprise, a government, a group of related individuals, or a group of related incorporated
and/or unincorporated enterprises which have a direct investment enterprise, operating
in a country other than the country of residence of the direct investor. A direct investment
enterprise is an incorporated or unincorporated enterprise in which a foreign investor owns
10% or more of the ordinary shares or voting power of an incorporated enterprise or
the equivalent of an unincorporated enterprise. Direct investment enterprises may be
subsidiaries, associates or branches. A subsidiary is an incorporated enterprise in which the
foreign investor controls directly or indirectly (through another subsidiary) more than 50%
of the shareholders’ voting power. An associate is an enterprise where the direct investor
and its subsidiaries control between 10% and 50% of the voting shares. A branch is a
wholly or jointly owned unincorporated enterprise. It should be noted that the choice
between setting up either a subsidiary/associate or a branch in a foreign country is
dependent, among other factors, upon the existing regulations in the host country (and
sometimes in its own country, too). National regulations are often more restrictive for
subsidiaries than for branches but this is not always the case.

The beginnings of FDI in e-commerce

The first major FDI policy decision affecting e-commerce came through the sector specific
guidelines for FDI contained in Press Note No. 2 (2000 series),1 released by the erstwhile
Department of Industrial Policy and Promotion (“DIPP”), now referred to as the Department
for Promotion of Industry and Internal Trade (“DPIIT”). The notification allowed 100% FDI
in business-to-business (“B2B”) e-commerce activities (buying and selling of products and
services by businesses through an online portal), provided that the company receiving the
investment divested 26% of their equity to the Indian public within 5 years of the investment,
if the company making the investment was listed in other parts of the world.2 This invited
forceful protests by nationalist bodies like the Swadeshi Jagran Manch which demanded rolling
back the decision in ‘national interest’.3 On the contrary, associations like the National
Association of Software and Services Companies (“NASSCOM”) hailed the government’s
decision. Simultaneously, they also called for allowing 100% FDI in business-to-consumer
(“B2C”) e-commerce (sale of products and services from businesses to individuals through an
online portal). 4 However, the government’s stance on forbidding FDI in B2C e-commerce has
not changed and has only been reiterated over the years.

By the end of 2005, a number of companies had approached the Foreign Investment Promotion
Board (“FIPB”) voicing difficulties in complying with the divestment requirement and sought
exemption from it. Subsequently, the government removed the 26% foreign equity divestment
requirement through Press Note 4 of the 2006 series.5

In 2010, the DIPP released a consolidated FDI policy6 where it defined e-commerce as “buying
and selling by a company through the e-commerce platform”.

The evolution of FDI in retail e-commerce

In 2012, the DIPP stated that retail trading through e-commerce platforms i.e. B2C e-commerce
was barred for companies with FDI, regardless of whether they were engaged in multi-brand

1
Department of Industrial Policy & Promotion, Press Note No. 2 (2000 Series), Ministry of Commerce &
Industry. Available at: https://dipp.gov.in/sites/default/files/pn23_0.pdf.
2
Id.
3
Staff Correspondent, Nasscom’s action plan for boosting e-commerce, The Hindu, July 28, 2000. Available at:
https://www.thehindu.com/todays-paper/tp-miscellaneous/tp-others/nasscoms-action-plan-for-boosting-e-
commerce/article28034973.ece.
4
Gaurav Malani, FDI in B2B e-comm, petro marketing, tea to get a boost, Economic Times, Nov. 14, 2005.
Available at:https://economictimes.indiatimes.com/fdi-in-b2b-e-comm-petro-marketing-tea-to-get-a-
boost/articleshow/1294024.cms.
5
Department of Industrial Policy & Promotion, Press Note No. 4 (2006 Series), Ministry of Commerce &
Industry. Available at: https://dipp.gov.in/sites/default/files/pn4_2006_0.pdf.
6
Department of Industrial Policy & Promotion, Consolidated FDI Policy 2010, Ministry of Commerce &
Industry. Available at: https://dipp.gov.in/sites/default/files/FDI_Circular_02of2010%20%206_0.pdf.
retail trading (“MBRT”) or single brand retail trading (“SBRT”).7 This was contrary to
industry expectations since the government had only recently increased the permitted level of
FDI through the government route in single brand (to 100%) and multi brand (51%) product
retailing through brick-and-mortar stores.8 Several rounds of discussion with groups like
NASSCOM and the Retailers Association of India (“RAI”) took place during 2012 and 2015
in which the NASSCOM openly supported the idea of allowing FDI in B2C e-commerce,
subject to some local sourcing conditions.9 The RAI also supported it, albeit only in non-food
products. The RAI hailed B2C e-commerce as a means to empower consumers and retailers in
tier II and tier III cities.10 A large number of stakeholders and jurists also supported it.

A DIPP discussion paper released in 2014 reiterated the government’s reluctance to allowing
FDI in B2C e-commerce.11 In a 2015 meeting between Nirmala Sitharaman, then minister of
state for commerce and industry and representatives from Snapdeal, Flipkart, the Federation of
Indian Chambers of Commerce and Industry (“FICCI”) and the Confederation of Indian
Industry (“CII”), the minister stated that FDI in B2C e-commerce would flood markets with
imported goods, which would be unfair to small retailers and would slow down the ‘Make in
India’ campaign.[14]

However, in 2015, the DIPP released Press Note 12 of the 2015 series, in which it permitted
FDI in e-commerce for SBRT entities, which operated through physical stores in India.[15]
According to this press note, Indian manufacturers could sell their own single brand products
online, provided that they manufactured 70% of the total value of the product in-house and
sourced 30% of the goods’ value from Indian enterprises.[16] However, the government
steered clear of allowing FDI in multi-brand retail through e-commerce platforms.

7
Department of Industrial Policy & Promotion, Press Note No. 4 (2012 Series), Ministry of Commerce &
Industry. Available at: https://dipp.gov.in/sites/default/files/pn4_2012_2.pdf; Department of Industrial Policy &
Promotion, Press Note No. 5 (2012 Series), Ministry of Commerce & Industry. Available at:
https://dipp.gov.in/sites/default/files/pn5_2012_2.pdf.
8
Retail team, India notifies 51% FDI in multi brand retail trading, Nishith Desai Associates, September 12,
2015. Available at: http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-
single-view/article/india-notifies-51-fdi-in-multi-brand-retail-
trading.html?no_cache=1&cHash=774283e9a27855b2597d5309df6cccea.
9
PTI, FDI in e-commerce: Nasscom for mandatory local sourcing, Business Standard, October 13, 2013.
Available at: https://www.business-standard.com/article/economy-policy/fdi-in-e-commerce-nasscom-for-
mandatory-local-sourcing-113103100927_1.html.
10
Retailers Association of India, Feedback on the discussion paper by DIPP- Indian E-commerce industry,
January 28, 2014. Available at: https://www.rai.net.in/images/advocacy/51508376_Feedback_on_DIPP.pdf.
11
Department of Industrial Policy & Promotion, Discussion Paper on E-commerce in India, September 2014.
Available at:
https://dipp.gov.in/sites/default/files/Discussion_paper_ecommerce_07012014%20%20%2013.pdf.
Press Note 3, 2016 series:

By 2016, the Indian e-commerce industry had grown large, but it was full of complex structures
established to get around the restrictions of the existing FDI policies.[17] E-commerce
platforms like Amazon and Flipkart with large foreign investments, employed novel means
like promotional funding, cashbacks and other methods to slash their prices and attract
consumers.[18] Moreover, though entities like Amazon and Flipkart portrayed themselves as
following a ‘marketplace model’, they derived a major portion of their sales from their group
companies, Cloudtail India Pvt. Ltd. and WS Retail Services Pvt. Ltd., respectively. In a
marketplace model, the entity only acts as a facilitator between consumers and sellers, and does
not act as a seller itself. However, companies like Amazon were following the ‘inventory
model’ under the garb of following the ‘marketplace model’ i.e. they were engaging in multi-
brand product retail through their own group companies on their own platform. This was
viewed as a violation of the FDI policy in India, which did not allow FDI in e-commerce for
multi-brand retail trading.[19] Many e-commerce companies used similar complex business
structures to circumvent the FDI restrictions on B2C e-commerce[20].

The RAI filed a petition before the Delhi High Court against deep discounting and similar
practices of e-commerce platforms which de facto violated FDI norms.[21] The petition was
one of the many factors which pushed the government to define terms like e-commerce, online
marketplace and clarify its position on FDI in e-commerce in 2016.[22]

Recognising these evasive methods being followed to circumvent the existing FDI policy on
e-commerce, the government introduced significant changes through Press Note 3 of the 2016
series.[23] It expanded the definition of e-commerce to include “buying and selling of goods
and services including digital products over digital and electronic networks.”[24] It also
defined, and distinguished between the ‘inventory based model’ and ‘marketplace model’ of e-
commerce.

Under the new regulations, e-commerce entities were allowed to provide support services to
sellers, but were barred from exercising ownership over the inventory or influencing sale prices
of goods and services.[25] Moreover, specific guidelines restricting e-commerce platforms
from influencing sale prices or from deriving more than 25% sales from a single seller were
put in place.[26]

The new conditions were considered a boon for traditional retailers as they hoped that it would
lead to parity in the market. NASSCOM termed the new regulations as a game changer, and
praised the government for putting an end to misinterpretations and for reiterating FDI policy
‘as is’ for the service sector.[27] However, it refrained from making any references to the
discounting clause. It also observed that the provision restricting procurement from a single
vendor to 25% of sales may prove to be counterproductive, in case the vendor is a seller of high
value goods like electronics.[28] It was also noted that such restrictions were not imposed on
other domestic e-commerce companies like Reliance.[29] From the standpoint of consumers,
it also indicated an end to deep discounts and lower prices from e-commerce companies
receiving FDI.

The co-convenor of Swadeshi Jagran Manch, Mr. Ashwani Mahajan, criticised the move of
allowing 100% FDI in e-commerce for the marketplace model, calling it a reward for prior
illegal behaviour of e-commerce companies. He also said that small shopkeepers would be
badly affected by the ‘predatory pricing’ policy adopted by such companies.[30] The
Confederation of All Indian Traders (“CAIT”) also protested against the move, warning that
global retailers would soon sidestep restrictions on multi-brand retail trading.[31]

Press Note 2, 2018 series and its aftermath

Despite the government’s attempts to regulate practices in the e-commerce sector through Press
Note 3 of the 2016 series, complaints about deep discounts and other similar practices by e-
commerce companies continued.[32] E-commerce companies like Amazon and Flipkart were
also accused of violating the FDI policy through their complicated seller structure that allowed
them to exercise some level of control over the inventory they sold.[33] The CAIT called India
an ‘e-commerce dumping ground’, disrupting the livelihood of thousands of people in the
country.[34]

In the Press Note 2 of the 2018 series,[35] the DPIIT introduced some changes to the FDI
policy in the e-commerce sector. These changes are in line with the government’s attempt to
balance its twin objectives of protecting small traders and encouraging foreign investments in
India.[36] Press Note 2 of the 2018 series stated that an e-commerce entity would be deemed
to adopt the inventory based model if it exercises control or ownership over the inventory.[37]
This would be deemed to be the case if more than 25% of the sales of such vendors are to the
e-commerce entity or its group companies. The notification also barred e-commerce entities
from selling goods of any vendor in which it or its group companies had an equity stake. It also
prohibited e-commerce entities from requiring merchants to sell goods exclusively on their
platform.[38] Some e-commerce companies like Amazon, Walmart had pushed for an
extension to fully implement the policies, which was refused by the government.[39] The
Swadeshi Jagran Manch appreciated the new norms and saw it as the government’s attempt to
shut down ‘predatory behaviour’ of e-commerce entities with FDI.[40] On the contrary,
NASSCOM called them a ‘significant policy change’ which was taken without any proper
consultation.[41] It also expressed its displeasure over the FDI policy trying to interfere with
issues relating to competition and consumer protection.

E-commerce entities like Amazon and Flipkart were badly hit by the changes. Many e-
commerce companies had developed their private labels and had exclusive partnerships with
companies (especially for smartphones) to attract more consumers and to generate higher
profits through such deals.[42] However, with the new amendments in the FDI policy, all such
practices became illegal. Walmart reportedly called India’s new rules on FDI in e-commerce
as ‘a regressive policy shift’ that ‘discriminated against foreign firms’.[43] Some stakeholders
commented that the new norms favoured large domestic business like Reliance that are engaged
in e-commerce and have the capital to build inventories, and would negatively impact start-ups
and entrepreneurs by reducing the infusion of foreign funds.[44]

The government in its clarificatory notification of 04 January 2019,[45] reasoned that rules
under Press Note 2 of the 2018 series were necessary to ensure that e-commerce entities did
not circumvent rules and to ensure proper implementation of the policy.[46] However, the new
notification may lead to short-term unemployment in the supply chain network (warehouse
expansions, delivery executives) if it negatively impacts the growth of e-commerce
entities.[47]

In light of these opinions, the government recently announced the constitution of a new
Committee on 12 July 2019 under the DPIIT to examine issues related to FDI in the e-
commerce sector, and provide suggestions.[48] The report of the committee is awaited.

Recent changes for FDI in e-commerce for single-brand retail trading:

The union cabinet approved a proposal on 28 August 2019 to relax FDI norms for SBRT
entities to commence e-commerce activities before setting up a physical store. However, they
have to set up their physical store within two years of commencing online retail. Previously,
SBRT entities had to set up a physical store before being allowed to undertake e-commerce
activities. This created an artificial restriction and seemed to be out of sync with current market
practices. The revised rules are expected to drive jobs, digital payments, customer care services,
training and product skilling.
India’s foreign direct investment (FDI) policy went through successive relaxations since the
process of economic liberalisation was initiated in 1991. The scope of FDI expanded gradually
from manufacturing to services and infrastructure sectors. As of now almost all the sectors are
open for FDI to varying degrees except for a very few prohibited ones.1 The domestic trading
sector was also opened in various phases. Full foreign ownership was allowed in wholesale
trading as early as in 1997. Wholesale trading would include resale, processing and thereafter
sale, bulk imports with ex‐port/ex‐bonded warehouse business sales and business to business
(B2B) e‐Commerce. The government allowed FDI up to 51 per cent in single brand retail
trading (SBRT) in the year 2000 with the stated objective of attracting foreign investment in
production and marketing, improving availability of various products and encouraging
competitiveness among Indian enterprises. Along with opening SBRT, India also allowed 100
per cent FDI in ecommerce with the restriction that the companies can engage only in B2B
ecommerce activities. Bookings done electronically between two trading partners for purchase
or sale of goods and services are referred to as ecommerce. B2B refers to trade taking place
between a manufacturer and a wholesaler or between a wholesaler and a retailer. Trade between
a company and the end‐users who are consumers of the product or service is referred to as B2C
commerce.4 E‐commerce activities have been divided into sub‐categories based on their
business model. One of them is known as Marketplace model in which the ecommerce portal
provides a platform for business transactions between buyers and sellers and earns commission
from the sellers of goods/services. Ownership of the inventory in this model vests with the
enterprises which advertise their products on the website and who are the ultimate sellers of
goods or services. The Market Place, thus, works as a facilitator of e‐commerce. Different from
the Market Place model is the Inventory Based model. In this model, ownership of goods and
services and the market place vests with the same entity (the ecommerce portal). In this model
the portal does not work as a facilitator of ecommerce but is engaged in ecommerce directly.5
India’s FDI policy does not allow FDI in retail ecommerce activities. The FDI policy describes
E‐commerce as the activity of buying and selling by a company through the e‐commerce
platform. Such companies would engage only in Business to Business (B2B) e‐commerce and
not in retail trading, inter‐alia implying that existing restrictions on FDI in domestic multiband
retail trading would be applicable to e‐commerce as well.
Relaxing the FDI policy in 2012 in trading sector, the cap on foreign equity in SBRT was
removed, thereby allowing 100 per cent foreign ownership. Simultaneously, FDI up to 51 per
cent was allowed in multi brand retail trading (MBRT) in 2012. But FDI was specifically
excluded from the retail ecommerce sector. The Consolidated FDI Policy (Circular 1 of 2013)
stipulated that “Retail trading, in any form, by means of ecommerce, would not be permissible,
for companies with FDI, engaged in the activity of single brand retail trading or multi brand
retail trading”. As such, the extant FDI policy does not permit FDI in B2C e‐commerce. The
efforts of many of the foreign as well as Indian ecommerce firms like yebhi.com,
fashionforyou.com to make a case for allowing FDI in this sector did not bear fruit.6 The main
focus of the present note is on B2C ecommerce which is not open to FDI yet.
The e‐commerce sector in India is reported be growing fast. For instance, between 2009 and
2012 it increased from US$3.8 billion to US$ 9.5 billion.7 eBay and Amazon are the two major
American e‐commerce players operating in India.8 eBay started its operations in 2004 by
acquiring Baazee.com, which was promoted by two Indians. Amazon Inc. entered almost a
decade later, in 2013. Both these companies are following the marketplace model. High growth
of the sector, large consumer base and the development of digital infrastructure have
encouraged various other foreign online sellers like Rakuten and Alibaba to focus on the Indian
market. All these developments have taken place even when the online retail sector or B2C
ecommerce is closed for FDI. In between many Indian start‐ups like Flipkart and Snapdeal
entered the sector. A few of them attracted substantial foreign investment. Companies which
were operating in the online retail sector have effectively adjusted their method of operation to
comply with the India’s FDI policy. During this process some of them have also been accused
of violating the provisions of the policy. On the other hand, there was also the tendency to take
advantage of the inventory model. This is the issue, which this note seeks to address in detail
taking the cases of Amazon and Flipkart, both of which have been accused of circumventing
the FDI policy. Incidentally, both the companies are among the largest ecommerce companies
in India in terms of net revenue for the year 2013‐14.10 They are also the closest competitors
of each other.

The Department of Industrial Policy and Promotion (DIPP) released Press Note No. 2 of 2018
on 26 December 2018, introducing certain additional conditions for the e-commerce sector,
under the Consolidated Foreign Direct Investment Policy of India (FDI Policy). The Press Note
amends paragraph 5. 2. 15. 2 (E-commerce activities) of the FDI Policy, and will come into
effect from 1 February 2019. Following confusion over certain aspects of the new
requirements, and parleys by the e-commerce industry, the Government released a clarification
(PN2 Clarification) on 3 January 2019, outlining some of its policy objectives and responding
to media criticism. The FDI Policy, as it stood prior to these amendments, permitted foreign
direct investments (FDI) with no governmental approvals (i.e. under the automatic route) in
entities engaged in the marketplace model of e-commerce, and prohibited FDI in entities
engaged in inventory-based model of e-commerce. A marketplace model was defined to mean
the provision of an information technology platform and other infrastructure by the e-
commerce entity, to facilitate transactions between buyers and sellers. An inventory model on
the other hand, was defined to mean a model in which thee-commerce entity has ownership of
goods, and directly sells to consumers on a business to consumer (B2C) basis. Press Note 2 of
2018 introduces a number of key changes that indicate the government's desire to better
regulate FDI in the e-commerce sector. This includes new regulations relating to inventory
control, affiliated sellers, and exclusive arrangements. According to the PN2 Clarification, the
impetus for these changes were complaints that certain e-commerce marketplaces (with FDI)
were indirectly engaging in inventory based e-commerce, and influencing the price of products
(which is also prohibited).The Government's position, as articulated in the PN2 Clarification,
is that these changes are not really 'new', but simply a clarification to better implement existing
regulations. From a business standpoint, that might well be a distinction without a difference.
Key Changes and Analysis Control over Inventory The most significant set of changes are
around control over inventory, and the relationships between e-commerce entities and sellers
on their platforms. The existing FDI Policy provides that e-commerce marketplaces should not
exercise ownership over goods sold on such marketplaces (as doing so would make it an
inventory-based marketplace). It also requires that a single seller/group should not account for
more than 25% of the aggregate sales on that marketplace, in order to ensure that affiliated
sellers did not account for most of the actual sales on these platforms. Practically, both
requirements have had limited success. While e-commerce entities complied with the
requirement to not 'own' inventory, there were complaints that some of them exercised indirect
control over such inventory through warehousing, packaging and handling arrangements. Press
Note 2of 2018 introduces an additional requirement that inventory should not be controlled by
the e-commerce entity. However, there is no definition of 'control' in this context, and we do
not expect it to be easy to define; practically, it may be a challenge to distinguish between
warehousing arrangements intended to promote handling efficiency and speed, and
arrangements intended to give indirect control. Similarly, the earlier restriction on 25% sales
on an e-commerce platform not originating from a single seller has been largely ineffective
large e-commerce entities simply created more affiliated sellers (and ensured that sales from
each remain under 25%). Press Note 2 of 2018 has removed this requirement, although we
understand that there is a possibility that the Government may reinstate this. In its place, Press
Note 2 of 2018 has introduced a new provision under which an e-commerce platform will be
deemed to exercise 'control' over a seller's inventory, if 25% or more of such vendor's purchases
are from the e-commerce entity or its group companies. If an e-commerce marketplace is
deemed to control the inventory of a vendor, Press Note 2 of 2018 also prohibits the vendor
from selling their goods on such e-commerce marketplace. The regulatory objective here might
be to limit the ability of e-commerce marketplaces (either themselves or through affiliates to
sell products to a vendor on a B2B basis (FDI regulations permit B2B sales), and thereby
control pricing or reduce the inventory-carriage risk for the vendors themselves (e.g., through
buyback or make-whole arrangements).There is however some confusion as to how this
provision is to be interpreted. Another reading of this provision might suggest that if more than
25% of the goods of any vendor are purchased by consumers through an e-commerce
marketplace, that e-commerce entity would be deemed to control the inventory of the vendor.
The Government should clarify this aspect through regulation or in discussions with industry
groups in the coming weeks. Relationship with Vendors: Equity Ownership Press Note 2 of
2018 states that "an entity having equity participation by an e-commerce marketplace entity or
its group companies will not be permitted to sell its products on the platform run by such
marketplace entity". It does not explicitly state that both direct and indirect equity participation
would count, but that could be the regulatory intent here. With this requirement, the
government has sought to restrict the ability of e-commerce entities to have a minority equity
stake in entities that act as sellers on their platforms. However, this blanket prohibition may
also claim unintended victims. This requirement could limit the prospect of e-commerce
players investing significantly in the vendor ecosystem in India this could impact the ability of
Indian e-commerce companies to develop and sell white-label brands or providing growth-
capital to small scale artisanal brands. Globally, white-label and artisanal brands have been a
driver of volumes and margins for e-commerce entities, providing them with an incentive to
invest in this ecosystem. The PN2 Clarification states that current policy does not restrict the
nature of products that can be sold on an e-commerce
marketplace including private labels however, it is currently unclear if this means that private
labels owned bye-commerce entities can also be sold on their marketplaces. Relationship with
Vendors: Exclusivity Press Note 2 of 2018 requires that an "e-commerce marketplace entity
will not mandate any seller to sell any product exclusively on its platform only". This restriction
is expected to adversely impact exclusive arrangements between e-commerce marketplaces and
telecom or white goods manufacturing companies, to sell products exclusively on their online
platforms (e.g. OnePlus sells its popular smartphones only via Amazon India, and not any other
marketplace).There is no guidance on how enforcing authorities would determine if a seller has
been "mandated" to sell its products exclusively on an e-commerce platform, or if the seller is
choosing to do so voluntarily. For instance, some brands with limited sales in India have made
a conscious decision to have an online presence only, to be able to better control costs and
reduce logistical challenges around a pan-India offline distribution network. For them, it might
make business sense to have an exclusive tie-up with one e-commerce platform in exchange
for exclusivity, the platform takes on the role of marketing the brand/ products by giving it
prominence and sharing some of the marketing expenses. How do such companies demonstrate
that this is not "mandated" exclusivity? Given the other changes in Press Note 2 of 2018, this
rule may not have been necessary. If an e-commerce marketplace has an arms-length
relationship with its vendors, as sought to be implemented by the other changes, a regulatory
prohibition on exclusivity may not be required. That decision could well have been left to
commercial judgment, for, exclusive arrangements are not always detrimental or anti-
competitive, and small vendors or start-up brands could actually benefit from them.
Relationship with Vendors: Level Playing Field Press Note 2 of 2018 requires that services
provided by e-commerce entities (such as warehousing, logistics, order fulfilment, advertising,
marketing, payments, financing, etc.) should be provided on an arm's length basis, and
generally ina fair and non-discriminatory manner (including, any cashbacks provided by group
companies of e-commerce entities).In short, e-commerce entities are required to provide the
same suite of services or facilities to all sellers under "similar circumstances". While the stated
objective of enabling a level playing field is laudable, this requirement will likely end up being
the toughest for e-commerce entities to comply with. For instance, how does one determine if
two sellers are in "similar circumstances"? Similar circumstances is not the same as 'same
circumstances', and in the absence of any guidance from the government, this could open a
Pandora's box when it comes to the interpretation and enforcement of this restriction.
Overzealous implementation could severely limit the growth of e-commerce companies in
India. Like any other business, e-commerce entities may wish to reward or provide enhanced
services to suppliers/ vendors who stand out for example, vendors who agree to reduce their
own margins to drive sales during a festive season, or who agree to sell their goods exclusively
on one e-commerce platform, or who dispatch goods within a short timeframe, or who agree to
participate in the marketplace's warehouse management program, and/ or agree to be audited,
etc. These are legitimate business objectives that should not be curtailed by policy.
Interestingly, the Press Note appears to recognize an existing practice of providing 'cashbacks'
to customers as not being violative of the prohibition on e-commerce entities influencing the
sale price of goods. Instead, Press Note 2 of 2018 only requires cashbacks to be given in a fair
and non-discriminatory manner. Compliance Press Note 2 of 2018 requires an e-commerce
entity to furnish a certificate annually, confirming compliance with these guidelines. Since
some of the compliances relate to vendors, it is unclear how the e-commerce entities will be
able to provide this certification. Would they be required to perform any diligence of their own,
or can they rely on self-certification by vendors? The changes set out in Press Note 2 of 2018
are set to come into force on 1 February 2019, giving the entire e-commerce sector less than a
month to re-organise itself.

Amazon in India
Amazon Sellers Services Private Limited was incorporated in Karnataka, in 2012 as a
subsidiary of Amazon Asia‐Pacific Resources Private Limited, Singapore. Its other shareholder
was Amazon Eurasia Holdings S.A.R.L, Luxembourg. The company started its commercial
operations through the website www.amazon.in in 2013. Within one year of its operation
Amazon reached the $1 billion sales in India. Amazon indeed mentioned that India was the
first country to reach $1 billion sales in such a short duration.
Allegation against Amazon
In September 2014, Amazon India was accused of violating the FDI policy in retail trade by
Reserve Bank of India. It was suspected that Amazon was selling directly to consumers and
showing the sale as being made by the vendors registered with it. The Enforcement Directorate
(ED) was directed to investigate the possible violations of FDI norms by the company. As a
part of the same investigation, commercial tax authorities in Karnataka issued a notice to some
of the vendors who sell their goods through Amazon India’s website. The authorities asked
them to stop storing their goods in Amazon’s warehouse. The dispute is related to the fulfilment
centres of Amazon through which Amazon meets the orders placed by the customers through
its website. The tax department has alleged that ownership of the product is transferred to
Amazon once the product reaches the fulfilment centre. Moreover, the sellers show the
fulfilment centre as their business branch. Hence, Amazon is liable to pay value added tax
(VAT) instead of the service tax that it pays.13 However, Amazon’s defence was that the
fulfilment centres only facilitate storage by third party sellers and it does not own any product
stored in these centres. Investigations are also going on whether Amazon is controlling the
prices of the products sold on its website.14 However, as of now any further development in
this case could not be traced.
Amazon’s Investment in Retail Venture15
In August 2014, Amazon and Catamaran Management Services Private Limited (CMS) jointly
acquired Prione Business Services Private Limited, a private investment firm promoted by Mr.
Narayana Murthy, founder of Infosys, in 2009.16 While CMS hold 51 per cent of the shares of
Prione, Amazon Asia Pacific Resources Pvt. Ltd. Singapore and Amazon Eurasia Holding
Luxembourg hold 48 per cent and 1 per cent respectively. The latter two companies are
subsidiaries of Amazon Inc and together they hold 100 per cent of the shares of Amazon Sellers
Services Private Limited which operates www.amazon.in. Prione acquired Cloudtail India
Private Limited (Cloudtail) in September 2014. As per the filings with Ministry of Corporate
Affairs (MCA), Prione holds 99.99 per cent and Mr. Arjun Narayanswamy (who is also
nominated by Prione) holds the remaining portion in Cloudtail. The ownership structure of the
Cloudtail is shown in the Diagram. It is obvious that Amazon contributed to the equity capital
of Cloudtail indirectly through Prione. Pegging Amazon’s investment in Prione at 49 per cent
appears to have been aimed at taking advantage of India’s FDI policy on downstream
investments as can be seen in the following. Press Note nos. 2 and 3 of 2009 series issued by
DIPP, mention that if there is any Indian company which is owned and controlled by resident
Indian citizens, then such a company can make downstream investments in any venture in
India. Such downstream investments will not be counted as FDI. Had Amazon invested the
same amount directly in Cloudtail which is in retail business, it would have been seen as a
violation of the FDI policy. With majority shares in Prione being held by CMS, Prione will be
seen as controlled by Indians and thus its downstream investments Service. This section is
based on the information compiled from the documents submitted to MCA by the respective
companies. Mr. Narayana Murthy holds 80% of shares of CMS and the remaining are held by
his wife.
RBI defines downstream investment as indirect foreign investment, by one Indian company
intoanother Indian company, by way of subscription or acquisition, while an Indian company
is a company incorporated in India under the Companies Act, 1956. would not have the FDI
tag. The fact, however, is that CMS is only a financial investor and the activities of Cloudtail
are directly aligned with those of Amazon. Even assuming that CMS controls Prione and
Amazon’s representatives on Prione’s Board, being in minority, cannot influence its decisions
(which is quite unlikely given their importance in Amazon’s operations, as can be seen in the
following) the fact remains that Catamaran joined hands with Amazon for the business it
generates for Cloudtail. In fact, the Shareholders’ Agreement between Amazon Asia Pacific
and Amazon Eurasia and CMS acting as trustee of Hober Mallow Trust gives certain rights to
Amazon which also bind ‘JV Subsidiary’ like Cloudtail. Amazon has two of its nominees on
the Board of Prione. It is important to note that the nominees hold senior positions in Amazon
Sellers Services Private Limited as country head and finance director.19 Since Amazon is
operating in India as marketplace model it is expected that it will have arm’s length distance
from the sellers. But its indirect ownership of Cloudtail and presence of its important personnel
on the board of Prione raises a serious question about such independence. It would be
unthinkable that Cloudtail will have the freedom to sell through Amazon’s competitors.
Notwithstanding India’s FDI policy, Amazon will have a claim on 49 per cent of the profits
generated out of this arrangement. It is possible that foreign retailers may direct the local sellers
through such intermediaries. Obviously, the foreign retailer is exploiting the flaw in India’s
FDI policy which ignores corporate realities. It is a different matter that the stated aim of
Cloudtail was to help India’s small and medium enterprises (SMEs) to take their business
online and tap the fast‐growing online customer base.20 The Memorandum of Association of
Cloudtail, however, does not have any reference to the SME sector. Further, most of the
products like mobile phones, electronic items, books sold by Cloudtail are hardly produced by
small and medium enterprises of India. Also there is no evidence to show that Cloudtail charges
lower commission from SME sellers.

Restructuring of Flipkart
Flipkart Online Services Private Limited (FOSL) was incorporated in 2008 and started its
commercial operations through its website flipkart.com. During April ‐‐ July 2009 it was
involved in online retail distribution of goods and services. Afterwards, it started operating as
a wholesale distributor. The promoters of FOSL incorporated another company called WS
Retail in June 2009. WS Retail was selling various goods through the Flipkart website. In other
words, Flipkart was selling goods through its retail entity WS Retail. Moreover, the remarks of
the auditors of FOSL for the year 2011‐12 suggest that, WS Retail was the only seller at the
Flipkart website. Between 2009 and 2012 FOSL raised around US $ 180 million from different
foreign PE investors.23 These fund raising activities led to the ED investigation against
Flipkart in 2012 for possible violation of FDI rules which restrict FDI in online retail trade.
Probably sensing trouble, the promoters of Flipkart resigned from the Board of WS Retail in
February 2011. They had also transferred their shareholding to others. WS Retail continued the
same business under the new ownership and management. Changes in the corporate structure
of Flipkart group did not end with divesting WS Retail. The domain name Flipkart.com which
was originally owned by Flipkart Online Services Private Limited was transferred to Flipkart
India Private Limited in 2011. Flipkart.com was again sold to Flipkart Internet Pvt. Ltd. in
2012. Flipkart Internet Pvt. Ltd which is a subsidiary of Singapore based Flipkart Marketplace
Private Limited (holding company) with 99 per cent voting rights and Flipkart Private Limited
(the ultimate holding company) with 1 per cent voting rights. MCA documents show that
another company by name Flipkart Marketplace Private Limited was incorporated as a
subsidiary of foreign company in India in 2012 and renamed as Flipkart Internet Pvt. Ltd later
in the same year. While breaking away from WS Retail is obviously related to the compulsion
of complying with India’s FDI policy, one is not clear of the additional factors that could have
been responsible for the broader restructuring exercise. In fact, the exercise makes Flipkart
Internet Pvt Ltd subsidiary of a foreign company. One possible reason could be its plans to list
on Nasdaq in which case it has nothing to do with the FDI policy.
From April 2013 onwards Flipkart.com started following the marketplace model of ecommerce
business24. Thus Flipkart.com (now under the control of Flipkart Internet Private Limited)
started providing a platform to several third party sellers. One of these registered sellers is WS
Retail. While there does not appear to be any direct relationship between Flipkart and WS
Retail either at ownership or at the board level, it is interesting to note that the products sold at
flipkart.com by WS Retail are sourced from Flipkart India Private Limited which is a cash and
carry entity of Flipkart group. Indeed it was reported that around 75 per cent of the business in
the flipkart.com comes from WS Retail. It has been noticed that some of the bestselling
products on flipkart.com like Moto brand of Motorola and Xiaomi brand smart phones are
exclusively sold by WS Retail. The discounts offered by WS Retail are also comparatively
higher than many other registered sellers. Two of the directors who control 46 per cent of the
equity of capital of WS Retail were earlier employees of Flipkart. They are reported to be close
to the promoters of Flipkart. Recent reports suggest that Flipkart is trying to reduce its
dependence on WS Retail.

A Way Forward
What emerges from the above two case studies is that while an international retailer could
circumvent India’s FDI policy by associating itself with an Indian financial investor, genuine
Indian retailers receiving investments from financial investors, who have no direct interest in
retail trade and are thus portfolio investors seeking large return on their investments, were
forced to change their operating model. The intent of the first is to circumvent the law, while
that of the latter is to secure finance to their operations. While the former strengthens the
position of the foreign retailer, the latter constrains the growth of the Indian retailer. To put
simply, the policy failed to distinguish between foreign retailers and foreign portfolio investors.
In fact, there is considerable inconsistency in treating foreign portfolio investors. Had the
criteria followed in case of commodity exchanges, asset reconstruction companies and the
defence sector, where foreign portfolio investors were treated differently from foreign direct
investors, Flipkart would have managed to continue with the B2C format. Interestingly, NRI
investments are also treated differently in case of air transport services. A similar approach in
case of e‐commerce would not have been against the spirit of promoting Indian entrepreneurs.
India should learn to use foreign investments strategically. For all intents and purposes foreign
portfolio investments and foreign direct investments are quit different from each other.
Portfolio investments are basically short term, with the foreign investor not being a competitor
but a collaborator in the sense of not being in the same line of activity and the sole purpose
being providing much needed finance in return for handsome gains. There are, however, other
risks in terms of huge capital repatriations and the companies being subjected to mergers and
acquisitions. The e‐commerce sector is growing rapidly and it is very important for the policy
makers to devise measures which do not place hurdles in the path of Indian entrepreneurs.
Every effort should be made to create conditions for the emergence of Indian entrepreneurs in
soft sectors at least. Prohibiting FDI in B2C ecommerce is directly related to the
implementation of FDI policy with regard to MBRT which is characterised by locational
restrictions.