India, for many centuries, has been known for trading, establishing the Silk-route, Spice-route. With tech advancement, e-commerce (ecom) has created a new world order, “Ecom route”. Ask any FMCG company, behemoth or small, on Amazon’s disruption on their sales. Ecom, in India also finds a prominent positioning in the politician’s election mandate. The rules of the game are changing and how!
It is estimated that India’s ecommerce industry is expected to jump threefold to $84 billion by 2021. Mobile phone adoption, cheaper mobile-data plans, internet penetration are some of the driving factors.
Regulations, specifically Foreign Direct Investment norms, created certain specific ways the business and entities are structured such as ‘market Place model’, ‘inventory based model’, direct online retail.
In this Guidance note for an entrepreneur to start her ecom business, we are discussing FDI barriers, top legislations applicable to ecom, the proposed policy changes. We had earlier written a brief overview about the ecom policy, which was released on 23 Feb 2019. You can read some excerpts here.
FDI barriers and regulations in entering the e-commerce sector
India has multiple restrictions and conditions on foreign investments (under the FDI Policy) into the e-commerce sector placed by the erstwhile Department of Industrial Policy and Promotion (DIPP) and now Department for Promotion of Industry and Internal Trade (DPIIT). These restrictions are applicable to all entities who receive any FDI.
Under the FDI Policy, ‘e-commerce’ encompasses not just products traded on digital and electronic networks but includes digital products and services, as well.
An ‘e-commerce entity’ is treated differently from other kinds of entities such as manufacturers, wholesale traders, single-brand retailers, etc. In a B2C market, an e-commerce entity is only allowed to engage in a marketplace model of e-commerce, where the e-commerce entity will only act as a facilitator between the buyer and seller and will have no control over the inventory of goods and services. If the e-commerce entity starts owning the products that are being sold on the platform, they are deemed to be an ‘Inventory’ based model of e-commerce which has been restricted in India in a B2C market, whereas inventory based model of e-commerce is allowed in a B2B market.
In case an e-commerce entity is operating an ‘online marketplace’ then it is subject to further restrictions under the FDI Policy (the new changes brought in by Press Note 2 of 2018) which are summarized as follows:
- An entity having equity participation by e-commerce marketplace entity or its group companies, or having control of its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.
- The inventory of a vendor will be deemed to be controlled by the e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies, thus rendering the marketplace an inventory-based of e-commerce.
- Market place entity can provide services such as logistics, warehousing, advertisement/marketing, payments, financing etc. could be provided by e-commerce marketplace entity or other entities in which e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors on the platform at arm’s length and in a fair and non-discriminatory manner. Provision of services to any vendor, on such terms which are not made available to other vendors in similar circumstances, will be deemed unfair and discriminatory.
- An e-commerce marketplace entity cannot mandate any seller to sell any product exclusively on its platform only.
- Cash-back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory.
- The entity must not directly or indirectly influence the sale prices of the goods and services and shall maintain level playing field.
- The entity will be required to furnish a certificate along with a report of statutory auditor to the Reserve Bank of India, confirming compliances of the guidelines under Para 220.127.116.11 of the FDI Policy, 2017, by September 30th of every year for the preceding financial year.
Another classification one should take care of is, whether the entity is dealing directly with final consumers (Business-to-Customer, B2C) or is simply dealing only with other business entities (Business-to-Business, B2B). The following table summarizes the different kinds of business entities having FDI that may take their businesses online and the major factors to be taken care of are:
|Type of Entity
||Can Keep Inventory?
||Marketplace Model (for goods and services:
||B2B and B2C e-commerce
(Selling its products manufactured in India, through wholesale and/or retail through e-commerce)
|Cash & Carry Wholesale Trader
(sells goods to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers)
|Single Brand Retail Trader
||B2C e-commerce (at least 30% Indian sourcing of products, and must be operating through at least one brick and mortar store)
|Food Product Retail Trader
||B2C e-commerce (retail trading of food products manufactured and/or produced in India)
||100% Government Approval
||(Subject to respective conditions and applicable laws) sale of services through e-commerce
||(Relevant Sectoral Cap) Automatic
Other laws and regulations to be considered while operating an e-commerce business
Irrespective of the fact that whether the entity doing the e-commerce business has FDI or not, these are the legal aspects of the business which are needed to be taken care of by any e-commerce business running entity.
||Law / Regulation / Legal Aspect
||Relevance to e-commerce
||Indian Contracts Act, 1872 read with Information Technology Act, 2000
||Information Technology Act, 2000 (IT Act) and General Data Protection Regulations (GDPR).
- Compliances under Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011
- Intermediary Rules 2011 under the IT Act stipulates the regulations relating to the content displayed on the intermediary website especially pertaining to defamation and obscenity.
- Under section 79 of the IT Act certain safe-harbours are available to e-commerce entities functioning as ‘Intermediaries’.
- Regulations applicable to ‘Intermediaries’ relating to the content displayed on the portal, especially pertaining to defamation and obscenity.
- If the end consumers happen to be an EU resident, GDPR compliance becomes mandatory.
- Issues related to data protection standards and data security. If the end consumers happen to be EU residents, GDPR compliance may also ensue.
||Intellectual Property Issues
- The entity must secure all trademarks and copyrights intended to be used by it, one must also be mindful to not infringe the trademarks and copyrights of other businesses as well.
- Selling of counterfeit goods and misuse of trademark rights by sellers listed on platform is a significant challenge, and must be dealt with by the platform operator to avoid prosecution.
- In the age of such wide use of internet e-commerce entities shall be aware of various intellectual property infringements that may happen online such as cybersquatting, identity theft, copyright infringement, caching, derivative works, domain name protection and etc.
- There are some added steps that the ecom entity has to take, as per the Draft Policy (read below)
||Payment and Settlements Systems Act, 2007 and other RBI regulations on payment mechanisms
||Under the law “payment system” means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. An e-commerce entity has to make sure if it qualifies as a payment system and shall comply accordingly.
As per the RBI notification DPSS.CO.PD.No.1102 /02.14.08/ 2009-10 dated 24 November 2009, it is mandatory for an intermediary which is receiving payments through electronic modes to have a Nodal Account in operation for settling the payments of the merchants on its online e-commerce platform.
Further depending on the envisaged arrangements for payments for the transactions on the portal, the entity must comply with the relevant rules relating to online payments made by the Reserve Bank of India (RBI).
||Labelling and Packaging
||An e-commerce entity as per the products listed on its platform must conform to the labelling and packaging norms set by the regulations made under relevant laws and the rules therein such as:
- Legal Metrology Act, 2009;
- Food Safety and Standards Act, 2006;
- Drugs and Cosmetics Act, 1940, etc.
||Legal Metrology Act, 2009 read with Legal Metrology (Packaged Commodity) Rules, 2011
||The web-platform must display requisite information about the goods displayed on sale, such as, units, dimensions, weight, etc. on product page itself.
||Sales, Shipping, Refunds and Returns
||The entity must have in place an adequate policy dealing with sales and shipping of the products, the default provisions relating to the legal incidence of transfer of property in goods, and other aspects of sales such as warranties and conditions, etc. are covered under the Sale of Goods Act, 1930.
The entity must also have in place, in clear words, a returns and refunds policy to be adhered by the sellers and buyers.
||Consumer Protection/ Dispute Resolution
||As a provider of goods or services under the Consumer Protection Act, 1986, the entity must have in place adequate policies to address consumer complaints. Moreover, it is advisable for the e-commerce platforms to have mediation and arbitration mechanisms in place as well.
||Fixation of prices by arrangements between sellers listed on the platform and the entity, exclusive sales agreements, and other practices under the scope of Sections 3 and 4 of the Competition Act, 2002 can be brought under the scrutiny of the Competition Commission of India. The entity must be mindful of these factors while entering into any arrangements which may leverage its existing dominance in the market, or work towards the creation of foreclosure or entry barriers in the relevant market.
||Irrespective of whether the annual turnover of the entity is lower than the prescribed threshold, e-commerce operators are not eligible for composition levy scheme under the GST laws of India. Moreover, it is mandatory for all e-commerce operators and sellers/distributors/suppliers who sell through e-commerce to get GST registration in all States where they purport to sell their goods/services.
||Other Local laws and Sector Specific Laws
||The premises from which the business is run, and the manufacturing, warehousing, and other aspects of the business will be continued to governed by sector specific laws and local laws as applicable. Due adherence to such laws must also be ensured.
Here’s an old post that we had written on licenses and registrations for warehouses.
The future of e-commerce in India
Keeping ‘data’ central to the idea of governing the e-Commerce industry in India the DPIIT on February 23, 2019 published the ‘Draft e-Commerce Policy’ (“Draft Policy”).
The Draft Policy focuses on data protection, the State’s paternalistic attitude towards the use of the citizen’s data and cross border transactions. The Draft Policy intends to regulate some things beyond e-commerce i.e. it proposes to regulate technologies like AI, IoT, Cloud computing and Cloud-as-a-Service etc. On a holistic level it is understood that these technologies empower e-commerce industry currently and are integral to its growth and therefore the Government intends to bring these technologies under the purview of the Draft Policy. The Draft Policy is a mix of visionary thought process, advanced technological solutions, putting in place digital infrastructure to support India’s digital economy.
Following is a summary of some of the significant features of the Draft Policy.
Changes in Customs regulations and export promotion through e-commerce
The Draft Policy proposes a customs electronic data interchange (EDI) platform, aggregating various government department concerned with import and export of goods in India, such as the Indian Post Department, DGFT, RBI, and other departments for facilitation of online customs clearance through the EDI platform. In addition, provision will be made to source Export Data Processing and Monitoring System (EDPMS) data from RBI for confirmation of payments, instead of Bank Realization Certificate.
KYC will be mandatory for all the shipping companies and individual sailors. The KYC will be mandated to identify exporters and importers and track suspicious activities. The Draft Policy also intends to include e-commerce in the National Integrated Logistics Plan with focus on faster delivery with emphasis on lower costs.
To promote exports through e-commerce the Draft Policy has suggested to include e-commerce sector in the proposed National Integrated Logistics Policy, where it will increase the existing regulation exemption of INR 25,000 for consignments through courier mode, it will simplify the requirement of documentation for exports, the EDI will be put in place at the earliest, transaction costs for MSMEs and start-ups shall be reduced who are undertaking any exports, the Government will set up Air Freight Stations (AFS) in all the leading airports across India so as to facilitate cargo processing at the airports and simultaneously the Government will try to negotiate lower costs of exports with international freight carriers through Indian Post department.
The Government intends to continue charging custom tariffs on any digital goods being traded electronically (imposing custom duties on electronic transmissions). Whereas the Government is strict on its stance of not accepting the permanent moratorium on custom tariffs for goods (including digital goods) traded electronically as proposed by the WTO.
Sale of Counterfeit and prohibited goods
A major emphasis has been given on curbing sales of counterfeit products through e-commerce in India. The Draft Policy emphasises on no trade mark infringement and that customers at large shall not be deceived by using deceptively similar trademarks. In case an e-Commerce entity receives a complaint about a counterfeit/fake product then the entity shall convey such misuse of the trademark within 12 hours from receiving the complaint to the trade mark owner. Whereas in case any prohibited goods/products have been sold on any e-commerce platform the entity operating such e-Commerce platform shall delist such products within 24 hours from receiving such complaint. This is pretty onerous and while the ecom entity is supposedly an intermediary, there are many obligations imposed on it. We had earlier written about intermediary liabilities which you can read here.
Further, all the e-commerce platforms/websites will have to display a list of all the prohibited products in India. In case a prohibited product is found to be sold on the platform or is found to be listed on the e-commerce platform the same has to be removed immediately and the seller listing such prohibited products shall be blacklisted and shall not be allowed to sell other products on the e-commerce platform. In some sense, the ecom entity should do some heavy policing.
Consumer Protection: The Draft Policy suggests a number of measures:
- All e-Commerce sites/apps available to Indian consumers shall display prices in INR and must have MRPs on all packaged products, physical products and invoices generated.
- Details of sellers shall be available for all the products sold online. Sellers shall provide undertaking regarding the genuineness of any product sold online.
- In case of a counterfeit product is sold to a consumer, the primary onus to resolve such an issue will be of the seller, but the intermediaries shall return the money paid to them by the customer and the marketplace shall seize to host such products on their platforms.
- The intermediaries shall curtail piracy on their platforms.
- Further to curb piracy a body of industry stakeholders will be created that shall identify ‘rogue websites’. These rogue websites will be added to ‘Infringing Website List’ (IWL). IWL will enable the ISPs to remove or disable these websites. It will also enable payment gateways to curtail the flow of payments to or from such rogue websites. Search engines will be able to efficiently remove such rogue websites identified in the IWL.
Mandatory Registrations in India
As per the Draft Policy, all the e-commerce entities including intermediaries and developers of mobile application which are available for download in India shall mandatorily be registered as importer on record or as a local entity through which the commerce is facilitated in India and also provisions regarding the appointment of a local representative has been introduced.
Provisions regarding the import of gifts
In the view of misuse of ‘gifting’ route, where foreign merchants use to sell cheap products to Indian customers as gifts to circumvent the customs and import duties, as an interim measure, all such parcels shall be banned, with exception of life-saving drugs.
Ease Of Regulation
Given the interdisciplinary nature of e-commerce, it is important for the Government to tackle various regulatory challenges. The Draft Policy suggests formulating a Standing Group of Secretaries on e-Commerce (SGoS), which shall be an important body for tackling various legal issues emerging from various statutes such and Information Technology Act, 2000 and rules thereunder, the Competition Act, 2002 and the Consumer Protection Act, 1986.
Additionally, the Draft Policy states that “All e-Commerce websites and application available for downloading in India must have a registered business entity in India as the importer on record or the entity through which all sales in India are transacted”.
The Government intends to establish technology wings in each Government department.
Data Infrastructure development
The Draft Policy takes forward the digital India initiative and intends put in place secure and digital infrastructure and encourage the development of data –storage facilities/ infrastructure including data centres, server farms, towers, tower stations, equipment, optical wires, signal transceivers, antenna etc.
The Government will add the above mentioned infrastructure facilities in the ‘Harmonized Master List’. This will enable regulation of the listed infrastructure in a more streamlined manner. Whereas the infrastructure will be put in place by various implementing agencies, while financing agencies may identify these as infrastructure that they may intend to support.
This will facilitate achieving last mile connectivity across urban and rural India. The Government by developing such data/digital infrastructure wishes to support India’s fast-growing digital economy and create employment.
Data and cross-border transfer of data
The Draft Policy recognises the rights of an individual over its data by stating that “An Individual owns the right to his data” and therefore the use of an individual’s personal data shall be made only upon seeking his/her express consent. It further states that the data of a group is a collective data and therefore a collective property of that particular group; it extends this rationale to state that “Thus, the data that is generated in India belongs to Indians, as do the derivatives there from”. But the Draft Policy ends up categorising data of Indians as a collective resource and therefore a “national resource”.
The Draft Policy states that “All such data stored abroad shall not be made available to other business entities outside India, for any purpose, even with the customer’s consent”, what follows this point in the Draft Policy, restricts sharing of data with any third party in a foreign country even if the individual has consented to such sharing of the data except where in the following cases:
- When data which us being shared has not been collected in India.
- Where sharing of data has happened as per a commercial contract between the business entities.
- Software and cloud computing services involving technology-related data flows, which have no personal or community implications; and
- MNCs moving data across borders, which is largely internal to the company and its ecosystem, and does not contain data that has been generated by users in India from various sources, including e-commerce platforms, social media activities, search engines etc.
The intent behind such restriction is that currently India lacks stringent laws regarding cross-border flow of data. If there are no strict restrictions on cross-border flow of data Indian stakeholders will merely be engaged in back end processing of data for the EU / US based ecommerce entities without having the ability to create any high-value digital products.
To leave some thoughts with you
Ecom is an industry and is growing rapidly. The Government is bringing in so many regulatory changes to harness the potential of the e-commerce industry and make India one of the key markets for the e-commerce stakeholders across the world. Government also intends to boost the local and home-grown e-Commerce business entities and wants to provide a level playing field for MSMEs. We are seeing a growing tension between these two ideologies – FDI in ecom and local capital in ecom.
Further the changes that have been brought to the Legal Metrology Act, 2009, Food Safety and Standards Act, 2006, Drugs and Cosmetics Act, 1940 and the regulatory changes proposed in the Draft Policy in regards to consumer protection such curbing sale of counterfeit products, mandatory local registration etc. are clear indication that in the age of e-commerce purchasing goods and services is no more the same and therefore new and modern laws are required to address consumer protection.
It will be interesting to witness the implementation of these proposed regulations and whether at all it will help in accelerating the ecom growth in India.