India: New E-commerce Framework – A Silver Lining In The Dark Cloud

With the advent of Press Note 2 of 2018 ("Press Note 2018") issued by the Department of Industrial and Policy and Promotion¹, the marketplace entities are required to provide similar services to all its vendors including the small, micro and medium enterprises, selling their products on the e-commerce platform of such marketplace entities ("SME vendors"). This will ensure an equal opportunity to all vendors to participate on the e-commerce platform more particularly the SME vendors who don't have access to proper infrastructure or are unable to afford incurring expenses on marketing and advertising and other logistics related services in respective of their products.

The prohibition imposed by Press Note 2018 on the marketplace entity to mandate a seller from selling any product exclusively on the e-commerce platform will encourage in creating a healthy competitive environment for all vendors on e-commerce platforms. Consequently, it will also result in overall enhancement in type and quality of the products available on e-commerce platforms and also the choices thereof for the end customers.

Overview of the new E-commerce Policy

In March 2016, the Government of India first permitted 100% Foreign Direct Investment ("FDI") under automatic route subject to compliance with certain conditions in the "marketplace model of e-commerce activities" by way of Press Note 3 of 2016 ("Press Note 2016"). This move of the Government clarified its position on FDI in marketplace model of e-commerce which was till then an ambiguous sector from an FDI perspective.

Thereafter on December 26, 2018, the Department of Industrial and Policy and Promotion² issued Press Note 2018, with the objective of reiterating the Government's stand on FDI in B2C e-commerce and in order to promote consumer interest by ensuring fair, competitive and transparent business practices.

Extension of time sought by Marketplace entities like Amazon and Flipkart

Press Note 2018 imposes certain prohibitions and restrictions on the e-commerce marketplace entities and the vendors, selling products on the e-commerce platform. Considering that the Press Note 2018 was to be made effective from February 1 2019, certain e-commerce marketplace operators including Amazon and Flipkart had requested the Government to extend the aforesaid timeline to enable them to revamp their existing operations for ensuring compliance with the Press Note 2018. However, the deadline for the Press Note 2018 to come into effect was not extended and it became effective from February 1, 2019³.

Salient amendments introduced by Press Note 2018

Exercising control on inventory – Press Note 2016 prohibited marketplace entities having FDI from exercising ownership on the vendor's inventory that was being sold on the e-commerce platforms. However, on and from February 1, 2019, marketplace entities are prohibited from exercising even 'control' (besides ownership) over such vendor's inventory. An e-commerce entity would be deemed to have control of the vendor's inventory if more than 25% of purchases of such vendor are from the e-commerce entity or its group companies.

Equity Participation - An entity (read vendor) is restricted from selling its products on the e-commerce platform of a marketplace entity if such marketplace entity has or its group companies have equity participation in that entity, or the marketplace entity has control over such vendor entity's inventory. While Press Note 2018 provides a threshold of 25% for ascertaining control on inventory, it does not provide a percentage threshold of equity stake or interest that the marketplace entity should hold in the vendor entity.

Fair and Non-discriminatory services - Press Note 2018 mandates the marketplace entity to provide fair and non-discriminatory services including warehousing, logistics, marketing, financing etc. to all its vendors. An e-commerce marketplace entity or any other entity in which the e-commerce marketplace entity has direct or indirect equity participation or common control, is required to provide to the vendor, the aforesaid services on arm's length basis and without any discrimination.

Exclusive arrangement – An e-commerce marketplace entity is not permitted to require any vendor to sell products on an exclusive basis through its platform.

Implications of new e-commerce policy on SME's

While Press Note 2018 would have a far reaching effect on the functioning and operations of the bigger marketplace operators like Amazon and Flipkart, even the SME vendors, may have to tackle a few challenges arising therefrom.

Challenges to be faced by SME vendors

SME vendors which have an equity participation from marketplace entities or whose inventory is controlled by any marketplace entity (i.e. more than 25% of the purchases of the SME Vendor are by the marketplace entity or its group companies) cannot sell products on the e-commerce platform of such marketplace entities. Further, considering that the Press Note 2018 does not provide a percentage threshold for equity stake or interest that the marketplace entity should have in the vendor entity, SME vendors having even a miniscule equity holding of a marketplace entity would become ineligible to sell their products on the e-commerce platform.

Prohibition of exclusive sale on e-commerce platform

Another condition in Press Note 2018 is prohibition on the marketplace entities to mandate any seller to sell products exclusively on its platform. Although, Press Note 2018 does not impose a corresponding restriction on the seller to not exclusively sell all of its products on the e-commerce platform.

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