India broadens e-commerce FDI rules

The rules announced by the Department of Industrial Policy & Promotion (DIPP) define online marketplaces as companies that facilitate the connection of buyers and sellers without themselves owning the goods to be sold. Companies are allowed to collect payments and provide support services on behalf of vendors, but they are not allowed to "directly or indirectly influence the sale price of goods or services."

Restricting influence on sale prices could have a big impact on companies that try to attract customers by offering discounts. However, the rules are aimed at the marketplace operators only, leaving open the possibility of vendors themselves discounting their items.

The DIPP also limits each vendor, and its group companies, to no more than 25% of the sales in a particular marketplace, in order to encourage marketplaces to build up a broad seller base.

Most Indian e-commerce companies already receive foreign investment; the likes of Flipkart, Snapdeal and ShopClues have graduated from small-scale venture capital backing to raise hundreds of millions of dollars at valuations in excess of $1 billion. Last year, for instance, Snapdeal raised $500 million from a group of investors including Softbank Group, Alibaba Group and Foxconn Technology Group.

It is not clear whether the new rules, which DIPP described as a clarification of existing policy, will be applied retroactively in these cases.

The new rules still limit FDI in inventory-based e-commerce models, in which the company owns its own inventory and sells to consumers directly. While business-to-business (B2B) sellers may be 100% foreign-owned, FDI in business-to-consumer (B2C) companies is prohibited unless the company manufactures its products in India or operates a brick-and-mortar business as well as online retail under the same brand.

E-commerce is expected to make up 19% of India's retail market by 2019, up from 2% in 2014. The online marketplace model has been popular there due to the country's relatively undeveloped warehouse sector, which makes it difficult for retailers to get access to storage space.

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