Legal Capsule: Revised FDI policy on e-commerce: Ensuring Fair Play? by Law Office of Madhavan Srivatsan
Revised FDI policy on e-commerce:
Ensuring Fair Play?
Authors: Madhavan Srivatsan
Law Office of Madhavan Srivatsan
“It is the spirit and not the
form of law that keeps justice alive.”
― Earl Warren
The recently revised FDI policy
on e-commerce as introduced by the Government vide Press note no. 2 of 2018,
has introduced new conditions and restrictions upon e-commerce marketplace
entities (EMEs). The revised policy was required to be complied by EMEs before
1st February 2019.
There are few interesting changes
to be noted in the revised policy, both in terms of addition and deletions from
the previous policy (i.e. the policy which was in effect prior to PN2 of 2018).
It becomes debatable as to whether EMEs with deep pockets have been provided an
ease of doing business or whether they are placed under restrictions in the
revised policy. In other words, whether the “brick and mortar” stores which are
otherwise placed under strict FDI rules have been benefitted or not under the
revised policy and whether a level playing field has been provided to them with
big entities. Let`s delve a little deeper into these issues and examine them.
Firstly, the earlier restriction
on EMEs not to have more than 25% of their total annual sales resulting from a
single vendor, has been done away with. It is not clear as to what is the
principal reason behind removal of this condition. In order to deal with this
condition, an EME required atleast four or more vendors registered on its
platform to collectively contribute 100% sales on its platform. Now, as this
condition has been done away with, it raises a debate as to whether one or
couple of vendors registered with any EME can contribute upto 100% of the sales
effected on the platform of EME.
Secondly, the revised policy has
introduced a new condition which restricts EMEs or any of their group companies
to have equity participation in any of the vendor entity registered on their
platform and which is purporting to sell its inventory on such platform of
EMEs. However, if any EME (through its
group company) is still holding indirect equity in the seller, through
another company in between, which is registered on the platform, then this
raises yet another question as to whether the revised policy prohibits only
direct shareholding or indirect shareholding as well. It is not uncommon to
structure foreign investments in India through more than one layer of
investment.
Thirdly, another condition which
has been introduced in the revised policy states that, inventory of a vendor
will be deemed to be controlled by EME if more than 25% (twenty five percent) purchases
of such vendor are from the EME or its group companies, and therefore the said
inventory cannot be sold on the platform of EME or its group companies. As per
media reports, EMEs are now trying to be fully compliant with the revised
policy as they have reduced their equity shareholding in the joint venture
between their parent companies and the vendor entities, to below 26%, and as
such the vendors are no longer ‘group companies’ of such EMEs. However, it will
be interesting to note that, on account of such reduction of shareholding,
would big market entities want to give up on the control element as well, which
is often exercised in such deals by way of complicated shareholders' agreements
and side letters. In foreign investment deals, merely because a foreign entity
is holding percentage shareholding which is less than as required to be
qualified as a group company, does not necessarily mean that such foreign
investor has given up its right to control the target. It may still exercise
control indirectly through various rights in the shareholders' agreement. Thus,
it would be interesting to see whether the restructuring of EMEs will survive
the restrictions under the revised policy.
As per the revised policy, if the
EME is exercising control over the inventory of the vendor by way of 25%
purchase rule as mentioned or is holding equity in the vendor registered on its
platform, it will render the vendor and its inventory “deemed to be owned
and/or controlled by such EME” and thus the business model of such EME would be
considered to be an inventory-based model of e-commerce, in which FDI is
totally prohibited. The rationale behind this restriction is to ensure that,
any foreign entity intending to own and operate an “e-commerce platform” does
not exercise any influence or control over the vendors registered on its
platform and acts exclusively as “market place”. In light of what has been
discussed above, is it really possible?
Keeping in the mind, the interest
and welfare of all the stakeholders in this industry, what is required to be
seen is, whether the policy makers should be looking at “compliance in form” or
“compliance in spirit” because the EMEs may, still continue to hold indirect
equity holding in the vendor entities, and/or exercise control over vendor
registered on its platform by way of shareholders’ agreement, and/or there may
be only very few large vendors registered on the EME platform as the
restriction to have not more than 25% sales from one vendor on the EME platform
has been removed. More such intriguing questions are yet to be answered by the
policy makers.