Market focus: e-commerce in India

Booming market

With over 759 million internet users, India is the world’s second-largest online market. It is estimated that by 2025, there will be over 900 million internet users in the country. During the pandemic, Indians have massively switched to e-commerce platforms for their daily purchases. This has given the country’s e-commerce market an additional boost. Consultancy Bain & Company expects the market size of the Indian e-commerce market to increase from around 30 billion dollars in 2020 to 350 billion dollars in 2030.

It is not without reason that retail giants such as Amazon and Walmart are betting heavily on India. Jeff Bezos recently promised to invest another billion dollars in India and Walmart expanded its 60% majority stake in Indian e-commerce market leader Flipkart with an investment of 1.2 billion dollars. In order to curb the influence of these American mega-corporations and to provide as much transparency as possible to consumers, the Indian government has introduced special regulations that you as a foreign investor need to take into account.

The rules for foreign companies in the Indian e-commerce market

Since 2015, 100% Foreign Direct Investment has been allowed in the Indian e-commerce market, but that does not mean that every foreign company can open its own webshop and start selling to the Indian consumer. The Indian government uses two different models within the e-commerce market with specific rules and restrictions for foreign investors:

The inventory model

In the inventory model, which we know from companies such as Amazon or Bol.com, goods and services become the property of the e-commerce company and are then sold directly to the customer. The e-commerce company is therefore the owner of the inventory and the platform on which the goods are sold.

Current Indian regulations do not allow Foreign Direct Investment in the inventory model. This means that a foreign company in India is not allowed to run a webshop on which it sells goods and services from its own inventory, because the regulations do not allow a foreign company to be 100% owner of the sales platform and of this inventory.

There are exceptions to this rule. A foreign entity can hold up to 49% of the shares of an Indian e-commerce platform with an inventory model if:

• Made in India products are sold on the platform;
• The founder is an Indian citizen;
• The company is headed by Indian management;
• The company raises funds domestically, which results in large Indian companies reinvesting in new start-ups in the sector.

The Marketplace Model

In the marketplace model, the e-commerce entity only owns the online platform and is therefore the facilitator between sellers and buyers. In addition, the e-commerce company is allowed to provide support services to its sellers such as logistics, warehousing, call center and payment collection.

In the marketplace model, 100% Foreign Direct Investment is allowed and foreign companies can therefore fully own an e-commerce platform, as long as they do not own the inventory. However, there are more rules for foreign-owned e-commerce platforms:

• E-commerce platforms are not allowed to sell products from companies in which they have shares; The e-commerce entity must not have any influence or ownership over the goods/services sold on the platform. For example, an e-commerce platform cannot take the initiative to offer products with deep discounts, the company will then automatically be considered an e-commerce entity with the inventory model, with all the consequences that entails.
• A company selling through an Indian e-commerce platform must not contribute more than 25% to the total turnover of the platform.
• Online exclusive brands are not allowed. It is prohibited for an e-commerce entity to make exclusive agreements with a seller to sell its products exclusively on one platform.
• The name & contact details of the seller must be on the website.
• After sales activities are the sole responsibility of the seller. The entity that manages the e-commerce platform must not offer this service.
• Consumer Protection Act 2019

At the end of July 2020, the Indian government introduced a new law with obligations for e-commerce retailers. The Consumer Protection Act 2019 aims to provide consumers with more transparency into the business and products, so that they can make informed decisions. From 2020, e-retailers will therefore be required to provide details of returns, refunds, exchanges, warranty, delivery and shipping, payment methods and complaint procedures, and the ‘country of origin’ on their platforms. The country of origin must also be mentioned on the products themselves.

International companies that offer their goods and services on the marketplace of an Indian e-commerce entity will be required to provide the above details to that entity. From 2020, e-commerce platforms will be required to provide as much information as possible about the sellers on their platforms to consumers. This includes the name of the company, address, customer service number, and any reviews or other feedback about the seller or the products.

Finally, the product must state the ‘total price’, along with any hidden extra charges such as shipping costs, and platforms are not allowed to ‘manipulate’ the price of the goods and services offered to make unreasonable profits. The e-commerce rules are enforced by the Central Consumer Protection Authority (CCPA) in India, and violations of the new act carry hefty fines. Therefore, make sure that your entity in India is always compliant with the latest regulations.

Not sure if you are fully compliant? Our experts will perform a check for you and give you clear next steps, so that you are fully up to date.