India: FDI In E-Commerce Activities | Press Note No 2 (2018 Series)

Last Updated: 2 January 2019
Article by Vinay Joy, Rishabh Bharadwaj and Neil Deshpande

Most Read Contributor in India, August 2019


The Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry, Government of India has issued Press Note No 2 (2018 Series) on 26 December 2018 (PN 2 of 2018). PN 2 of 2018 amends paragraph (e-commerce activities) of the current 'Consolidated FDI Policy' of the DIPP effective from 28 August 2017 (FDI Policy), effective from 1 February 2019. Paragraph (e-commerce activities) incorporates the provisions of Press Note No 3 (2016 Series) dated 29 March 2016 (PN 3 of 2016), pursuant to which foreign direct investment (FDI) up to 100% was allowed under the automatic route in entities engaged in the marketplace model of e-commerce, subject to compliance with certain conditions. However, FDI in entities engaged in the inventory-based model of e-commerce was expressly prohibited, and this continues to be the case as on date. A marketplace based model of e-commerce is a model of providing an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. An inventory-based model of e-commerce, on the other hand, is a model where inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly.

While the conditions contained in PN 3 of 2016 were introduced to bring some comfort to brick and mortar retailers and to ostensibly create a level playing field for such retailers with their e-commerce counterparts, it was felt in some quarters that the wording of PN 3 of 2016 was not stringent enough and that the intended goal of such PN 3 of 2016 was not being achieved.

With the Indian general elections being just around the corner, it appears that the Union Government has moved just in time to plug some of these alleged gaps in the FDI Policy (on e-commerce activities) by issuing PN 2 of 2018. PN 2 of 2018 primarily targets the following conditions for receiving FDI in e-commerce activities (in the marketplace model): (a) control over inventory by the provider of the marketplace platform, (b) equity participation by the provider of the marketplace platform in the sellers that are selling on such platform, (c) fair and non-discriminatory dealings by the marketplace platform with such sellers, and (d) exclusivity arrangements between such platform and sellers.

Key Highlights


Ownership and control over inventory:


In the present regime, entities providing a marketplace platform (Marketplace Entities) are restricted from: (a) exercising actual ownership over the inventory, and (b) permitting total sales value on its marketplace from one seller or such seller's group companies in excess of 25% of such marketplace's total sales value in a financial year. 'Group companies' means two or more enterprises which, directly or indirectly, are in a position to: (a) exercise 26% or more of voting rights in other enterprise, or (b) appoint more than 50% of members of board of directors in the other enterprise. The DIPP has, in the past, clarified that two or more companies that are owned and / or controlled by a common parent company (either directly or indirectly) are deemed to be group companies.


Pursuant to PN 2 of 2018, 'ownership' or 'control' over inventory of the sellers by a Marketplace Entity will be the primary test for differentiating a marketplace model of e-commerce from an inventory-based model of e-commerce, as opposed to the present 'ownership' only test.


If more than 25% of a seller's inventory is purchased from the Marketplace Entity or its group companies then such Marketplace Entity will be deemed to have control over the inventory sold by such seller.


Owing to this change, Marketplace Entities will not be able to exercise 'control' over inventory sold on their platform by the sellers, failing which, the e-commerce activities of such Marketplace Entities will be treated as inventory-based e-commerce activities.

Comment: This change will impact Marketplace Entities that use one or more of their group entities to sell goods to sellers on a business to business basis with such sellers in turn listing the goods on the Marketplace Entity's platforms for sale to retail customers. Additionally, this restriction may also impact sellers selling on marketplace platforms even if such sellers are not FDI recipients or foreign nationals as some of them may now be forced to look at multiple sources for acquiring their inventory. This is likely to put an additional capital burden on such sellers.


Equity participation and control over inventory:



Presently, the FDI Policy does not prohibit equity participation by Marketplace Entities in any seller entities operating on its marketplace platform.



Pursuant to PN 2 of 2018, sellers will not be permitted to sell their products on platforms run by a Marketplace Entity if such Marketplace Entity or its group companies have equity participation in the sellers or control over the inventory (as discussed above).

Comment: Unlike other provisions of PN 2 of 2018, the DIPP has not clarified whether such equity participation is direct or indirect. Therefore, structures where subsidiaries of an Indian owned and controlled company (also having minority equity participation from a Marketplace Entity or its group companies) carry out e-commerce activities on the platform of such Marketplace Entity may be workable absent any subsequent clarification from the DIPP or any other competent authority. However, such a view may not be in line with the spirit and intention of the changes sought to be made by PN 2 of 2018.


Fair dealings:



Marketplace Entities will have to ensure that any services (such as in relation to logistics, warehousing, fulfilment, etc.,) provided by them (or, any entity in which such Marketplace Entity has direct or indirect equity participation or is under common control of such Marketplace Entity) (Service Providers) to the sellers carrying out e-commerce activities on their platforms are fair and non-discriminatory and on an arms-length basis. This is an extension of: (a) the restrictions on Marketplace Entity's influence (direct or indirect) on sale price, and (b) the Marketplace Entity's obligation to maintain a level playing field vis-à-vis the sellers on its platform.


Additionally, cashback offers provided to buyers by group companies of the Marketplace Entities will have to be fair and non-discriminatory.



PN 2 of 2018 specifies that service terms offered by the Services Providers to one or more sellers but that are not offered to other sellers in similar circumstances will be deemed to be unfair and discriminatory.

Comment: Compliance with these conditions will continue to be confusing on account of the vagueness of these conditions. It is unclear what sellers in 'similar circumstances' mean for purposes of determining fair and non-discriminatory terms of services provided to various sellers. Additionally, it may not be commercially viable to provide cashback offers to buyers in an unfair or a discriminatory manner, unless applicability of these conditions is also vis-à-vis the sellers, wherein any unfair or discriminatory treatment of sellers will affect the buyers buying from such sellers. It will certainly help if the DIPP further clarifies these conditions.


Exclusivity arrangements:


Marketplace Entities will be prohibited from requiring the sellers to sell their products exclusively on their platforms.

Comment: PN 2 of 2018 does not clarify if: (a) multiple platforms that are operated by group companies or a Marketplace Entity, or (b) specific contractual terms restricting a seller from selling on specified platforms will be considered as imposition of exclusivity. Absent any specific clarification from the DIPP, a view could be taken that only affirmative exclusive arrangements are prohibited through this condition. However, such a view may not be in line with the spirit and intention of the changes sought to be made by PN 2 of 2018.


Other changes:


It would be relevant to note that the restriction on capping the total sales value of a Marketplace Entity's platform from one seller or such seller's group companies to 25% of such platform's total sales value in a particular financial year has been done away with.


Marketplace Entities will be required to submit a certificate along with report of its statutory auditor to the Reserve Bank of India. This certificate should confirm compliance with the guidelines for each financial year by 30 September of the calendar year in which such financial year ends.

Comment: While the removal of the aforementioned 25% restriction cap on total sales value is a welcome change for Marketplace Entities, it will be a practical nightmare for them to monitor the compliance of the new condition with regard to the sourcing of inventories by sellers. As PN 2 of 2018 will be effective from 1 February 2019, the aforementioned requirement will have to be complied with by the Marketplace Entities from the financial year ending 31 March 2019 onwards (i.e., the first submissions will have to be made by 30 September 2019 for the truncated period between 1 February 2019 and 31 March 2019).

Concluding Remarks:

As discussed above, many of the changes introduced by PN 2 of 2018 require some additional clarifications regarding their applicability and scope. The effects of PN 2 of 2018 will be felt through the industry and it may force a number of influential players to re-examine their respective business models going forward. Given the short time within which the changes pursuant to PN 2 of 2018 are sought to be implemented, Marketplace Entities would need to quickly take measures to comply with such provisions. In the meanwhile customers can optimistically expect an extended "sale" season to continue.

A clarification from the DIPP on grandfathering of existing structures and the forward looking applicability of PN 2 of 2018 (i.e., only to those Marketplace Entities that receive FDI on or after 1 February 2019) would be appreciated by the industry. This is also relevant keeping in mind India's push for ease and certainty of doing business in the country and its commitments under investment treaties.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Dhaval Vussonji & Associates
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Dhaval Vussonji & Associates
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions