'E-commerce marketplace model not recognised under FDI'

06 Jan '16

2 min read

In what could be a big blow to e-commerce players in India, the Department of Industrial Policy and Promotion (DIPP) which monitors foreign investment in India, has told the Delhi High Court that the marketplace model used by e-commerce companies is "not recognised" in the country's FDI policy.

The department has also suggested that it is up to the financial watchdogs to investigate whether there has been any violation of FDI rules by online retailers, The Economic Times has reported.

DIPP is "mandated only with formulation of FDI policy", it said in a reply late last month in a case filed by brick-and-mortar retailers. The department's position assumes significance as the country's biggest online retailers such as Amazon India, Flipkart and Snapdeal function as marketplaces — platforms linking buyers with sellers — because the rules don't allow overseas investment in entities that sell directly to consumers.

"FDI is a capital account transaction and thus any violation of FDI regulations are covered by penal provisions of FEMA (Foreign Exchange Management Act)," DIPP told the high court. It also emphasised that the country's regulations "unambiguously" do not permit foreign investment in B2C e-commerce and said India only allows 100 per cent overseas capital in B2B ventures. Traditional retailers say the marketplace model is merely a ruse to get around this stipulation.

Over the past year, India's brick-and-mortar retailers have been complaining loudly that foreign-funded ecommerce companies violate FDI norms. The Retailers Association of India and the All India Footwear Manufacturers & Retailers Association have filed separate petitions against the government in the Delhi High Court alleging the circumventing of FDI norms. (SH)

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