Government planning tighter FDI rules for ecommerce sector

NEW DELHI: India is likely to tighten the foreign direct investment (FDI) rules for e-commerce to check companies set up by the online marketplaces from trading on their own platform.

The Department for Promotion of Industry and Internal Trade (DPIIT) may issue a clarification through a Press Note, expressly prohibiting e-commerce platforms from holding stake in a seller, directly or indirectly.

“There are concerns that some e-commerce companies are not following the rules and hold indirect stakes in affiliates. This has come to our notice,” said one official.


Press Note 2 of 2018 had banned entities related to an e-commerce marketplace from selling its goods on that marketplace. Further, the restrictions also applied to those entity whose inventory was controlled by the marketplace.

The inventory of a vendor will be deemed to be controlled by the marketplace if more than 25% of the vendor’s purchases are from the marketplace entity, including its wholesale unit.

These measures were instituted to create a level-playing field and ensure that FDI-funded e-commerce entities functioned only as marketplace.

The Confederation of All India Traders (CAIT) has repeatedly complained to the government that e-commerce companies were violating FDI policy.

“The 25% definition is not working and blatant violations are taking place which is not in line with the spirit of law. We want to give clarity once for all,” said another official. "There is a scope for improving the current framework...," said a senior government official.

The department will hold consultations with all stakeholders before it issues the clarification.

“When B2C ecommerce is not allowed, these companies have circumvented the rules by setting up affiliates. We want to ensure a level playing field for all,” the second official said.

E-commerce marketplaces can’t mandate any seller to sell any product exclusively on its platform only.

“While many loopholes have been plugged over the years, marketplaces have come up with new structures to sidestep the rules such as having their own brands, third party manufacturing, curate more brands and increase margins, that makes many rules redundant,” said an expert on FDI issues.