Business Models

Is the Marketplace model even recognised under Indian Laws?

Rashmi Guptey
12th January 2016

The DIPP recently told the Delhi High Court that the marketplace model used by ecommerce companies is “not recognised” in the country’s foreign direct investment (FDI) policy and that the financial watchdogs are to investigate any violation.

After pleasant year end which saw FDI reforms like sectoral relaxation, foreign participation into Alternative Investment Funds, and REITS we were hopeful that 2016 would give us greater reasons to rejoice on the FDI front especially for the e-commerce sector. Instead- a rather unsettling question stares us in the face “Is the Marketplace model even recognised under Indian Laws?” The DIPP recently told the Delhi High Court that the marketplace model used by ecommerce companies is "not recognised" in the country's foreign direct investment (FDI) policy. DIPP further stated that it was up to the financial watchdogs(ED/RBI) to investigate whether there has been any violation of FDI rules by online retailers.

The statement above clarifies that retail trade in any form (Non B2B ecommerce trade) by e-commerce companies’ remains prohibited under the FDI regime and that the very concept of “Marketplace” adopted by many ecommerce companies in India has no status or place in India’s FDI framework. E-commerce companies on the other hand argue that a Marketplace is essentially a “Meeting Point” – a technology platform where buyers and sellers meet to facilitate their transactions online. The technology Platform provides payment facilities, logistic services, warehousing capabilities etc and charges fees for it. Companies such as Snap deal, Amazon, Jabong and several other e-commerce companies have adopted a marketplace model. The above matter is sub-judice and the Delhi High Court is yet to give its verdict on the writ petition filed by India Footwear Manufacturers and Retailers Association (AIFMRA) & Ors. versus Union of India & Ors (W.P. 7479 of 2015) listed before the Honourable High Court of Delhi. The association representing brick-and-mortar retailers, the Retailers Association of India (RAI) and the All India Footwear Manufacturers and Retailers Association (AIFMRA), claim that e-commerce companies are flush with foreign funds and have been given undue advantage by allowing them access to FDI as a result of which they have been able to provide hefty discounts that traditional retailers cannot match.

They also argue that brick and mortar retailers were never permitted such foreign capital infusion due to the FDI policies in this regard and as a result have been unable to compete. The Delhi High court is yet to announce its verdict, however a probe has been ordered to investigate any FDI violation by 21 such companies which have adopted the Marketplace model.

A few questions that need answered are: 

–What would be the nature of ED’s probe be? Purely related to investigation into any retail trade by these companies on any other parameters?
– Does use of a Technology Platform (“Marketplace”) constitute retail trade and if yes what qualifies as non-compliance?
– If these companies had adopted any other model /structure for retail trade would they be defaulters of FDI and FEMA?
–Why were these questions not raised at the point when such companies were raising such large rounds of capital?
–If indeed these companies are looked upon as non-compliant – what would be nature of penalties?
– Isn’t a market place the way forward to connect people willing to buy and sell goods/services in a fast changing digital India?
–How would Foreign Investors view our regulators going as far back as 4-5 years in their very own interpretation of regulatory policies? While this controversy and petition is certainly a matter of concern; until the Delhi High Court comes out with a verdict and the Enforcement directorate completes its probe, it would be a good idea to wait and continue to keep a close tab on the developments on this front...even if exasperated!