Developments in e-commerce

E-commerce and FDI in India: Key legal insights

The Indian e-commerce sector has transformed the retail industry by enabling transactions on digital platforms. The sector has been at the forefront of the Indian startup ecosystem, attracting substantial investment for more than a decade. Between 2014 and the first-half of 2024, Indian e-commerce startups raised USD34 billion and 25 such startups became unicorns, including Flipkart, BigBasket, Meesho, Nykaa and Zepto. Several such entities, including Nykaa and Zomato, have listed on the Indian stock markets and a growing number of e-commerce companies are expected to go public in the coming years.

Fuelled by rapid digital penetration, increasing consumer demand and the rise of direct-to-consumer brands and quick commerce, India’s e-commerce market is estimated to reach USD325 billion in 2030, a robust compounded annual growth rate of 21% from 2023 to 2030. Key driver of this growth has been liberalisation of the e-commerce sector, attracting significant foreign direct investment (FDI) inflows.

This article summarises the evolution of the regulatory environment governing FDI in e-commerce, highlights the shifts in business models, and provides key legal insights.

E-commerce and traditional retail

The Indian regulatory stance on FDI in e-commerce has developed in response to concerns historically linked to traditional retail. The regulatory landscape in relation to FDI in e-commerce is driven by the need to protect domestic retailers and brick-and-mortar stores from competition with organised global retailers, to maintain a level playing field in the market.

Restrictions on FDI in e-commerce are influenced by both economic and political considerations. As e-commerce’s influence grows, policymakers have aimed to balance foreign investment with domestic interests, resulting in stringent conditions for e-commerce entities with foreign ownership.

As a result of these socio-economic and political factors, 100% FDI is permitted only in the marketplace model, whereas FDI is restricted in the inventory-based model. In a marketplace model, the e-commerce entity only provides an information technology platform on a digital network and merely facilitates transactions between sellers and end customers.

In an inventory-based model, the e-commerce entity owns or controls the inventory of goods and services sold on the platform and sells them to the consumers directly. While the definitions of “e-commerce” and “marketplace model of e-commerce” under Indian foreign exchange laws include services within their ambit, the regulators have clarified that the sale of services through e-commerce, on a standalone basis, is not subject to e-commerce conditionalities.

Similarly, business-to-business (B2B) e-commerce is governed by conditions applicable to wholesale cash-and-carry trading, and not by the specific e-commerce conditionalities prescribed under the Indian foreign exchange laws. Hence, the crux of the issue is to prohibit the inventory model of e-commerce.

Evolution of the law

Over the years, India has liberalised the regulatory regime governing the e-commerce industry. In 2000, FDI in e-commerce was first permitted in B2B e-commerce. However, in view of the concerns of small brick-and-mortar retailers, the government has consistently maintained that FDI in business-to-consumer (B2C) or inventory-based e-commerce is not allowed.

In 2015, the government permitted entities undertaking single brand retail trading through brick-and-mortar stores to undertake single brand retail trading through e-commerce. In addition, it allowed manufacturers producing goods in India to sell such products to end customers through e-commerce platforms.

However, barring these limited relaxations, FDI in inventory-based B2C e-commerce and multi-brand retail trading through e-commerce continues to remain prohibited, protecting traditional retail.

In 2016, the government introduced regulatory measures under Press Note 3 of 2016 (PN3) to address the growing concerns of offline retailers. PN3 formally recognised the distinction between marketplace and inventory-based models of e-commerce, confirming that 100% FDI is permitted in the marketplace model (subject to several restrictions) while FDI is prohibited in the inventory-based model.

PN3 allowed e-commerce entities to provide support services to sellers and required them to maintain a level playing field, but barred them from influencing the prices of goods sold on the platform, or from permitting more than 25% of sales through one vendor or its group companies (25% sales limit).

Another slew of restrictions was introduced under Press Note 2 of 2018 (PN2), modelled on the framework set out in PN3, aimed to ensure that e-commerce businesses remain true marketplaces, restricting e-commerce entities to transition into inventory-based operations, which could affect traditional local offline retailers.

PN2 introduced restrictions on e-commerce entities from exercising “control” on inventory, and barred any equity participation in sellers by e-commerce entities or their group companies. While PN2 removed the 25% sales limit, it introduced a restriction on procurement of more than 25% of goods by a seller from the e-commerce entity or its group companies, beyond which threshold the sellers’ inventory will be deemed to be controlled by the e-commerce entity.

In addition, it prohibited e-commerce entities from mandating sellers to sell products exclusively on their platforms. Further, it required e-commerce entities or their group companies offering support services to the sellers to provide such services in a fair and non-discriminatory manner. Such PN2 restrictions continue to govern FDI in the e-commerce industry today.

Compliance an evolution

E-commerce players have continually structured and restructured their operations to navigate this dynamic and complex regulatory framework while catering to the growing consumer demand for online retail.

With the aim to stay compliant with the conditions set out in relation to the marketplace model of e-commerce and the prohibition of FDI in the inventory-based model, Indian e-commerce entities have adopted various models, including: (1) a licensing model, where the operational control of e-commerce platforms is licensed to Indian entities to which the Indian foreign exchange requirements do not apply; (2) an Indian-owned and controlled model where the platform entities are structured as Indian owned and controlled entities to which FDI-related restrictions do not apply; and (3) a true marketplace model, where the platform entity, which has received FDI, refrains from any inventory control or influence over pricing, remaining in strict compliance with the law.

In addition, amid the growing drive towards public listing of e-commerce startups in India, many e-commerce entities are looking to increase the ownership of domestic investors and dilute foreign shareholding to steer clear of regulatory restrictions.

These structures are primarily designed to remain compliant with the law. However, amid the burgeoning of e-commerce, traditional retailers have raised concerns around deep discounts, exclusivity arrangements, and the preferential treatment of certain sellers by large e-commerce entities.

Remarkably, such concerns, which the Indian foreign exchange laws seek to allay, extend beyond foreign-backed entities to large domestic e-commerce players and retailers. In this context, it seems perplexing that the restrictions primarily target entities with FDI while similarly positioned domestic players escape such regulatory oversight.

Many of these concerns, such as pricing strategies and preferential treatment, have significant overlaps with, and are more appropriately addressed under, competition law and consumer protection frameworks, rather than being treated solely as FDI-related issues.

Conclusion

Changing FDI norms have significantly shaped and contributed to the growth of the e-commerce industry so far. As the e-commerce industry continues to expand, the regulatory framework should be further aligned to facilitate sustained progress and innovation, creating a robust foundation for future growth of the industry.

SHARDUL AMARCHAND MANGALDAS & CO
Express Towers, 23rd Floor,
Nariman Point, Mumbai – 400 021, India
Tel: +91 11 4159 0700
Email: connect@amsshardul.com
www.amsshardul.com

Back to top

---

E-commerce in Russia: what foreign business needs to know

With extensive internet penetration reaching about 88%, development of e-commerce is one of Russia’s key strategic initiatives, currently accounting for about 4.6% of GDP. In 2020, despite overall economic downturn, the pandemic spurred a substantial increase in online shopping across the country, extending even to Russia’s most remote regions.

According to Data Insight, the online retail market reached EUR74 billion (USD78.42 billion) in 2023. Compared to 2022, the number of orders grew by 78%, and market volume increased by 44%. Projections for 2024 suggest that e-commerce sales will reach EUR97 billion, with an annual growth rate of about 30%.

Electronics and small home appliances remain some of the most popular online purchases. However, the e-commerce market is diverse, offering opportunities for businesses across a broad range of products to find their niche.

Local presence

Local presence. In most cases, foreign companies are not required to establish a legal presence in Russia to operate an e-commerce business.

However, foreign online retailers targeting Russian consumers (such as those with a Russian-language website) must comply with certain mandatory provisions under Russian law, including regulations in these areas:

• Consumer protection;
• Data protection;
• Competition;
• Advertising;
• Anti-money laundering and currency control, among others.

To meet these regulatory requirements, a foreign seller may need to establish partnerships with local logistics providers, IT service providers, and legal or administrative service providers.

Website requirements

Online sellers generally have flexibility in the choice of content and language on their website. However, to serve Russian customers specifically, an online store must include these mandatory elements:

• Legal information about the seller including its name, registration number, address and contact details (aggregators must also provide this information about both themselves and the end seller);
• Terms and conditions (T&Cs) for products and services offered online. The product listing must include a comprehensive description of the goods, place of manufacture, price, terms of purchase, delivery information, shelf life or service life, warranty period, payment methods, and the period during which the offer to conclude the contract is valid;
• Privacy policy outlining the seller’s personal data processing practices; and
• Integrated online payment system from an accredited payment processing provider.

While it is not mandatory to use a domain name with a Russian extension to sell to Russian customers, such domain names can be obtained through an accredited registrar.

If a website receives 500,000 or more visits from Russian users daily, the website owner must establish a legal presence in Russia and register with the Russian data protection authority.

Personal data requirements

Russian data protection legislation applies to: (1) processing of personal data by all operators located in Russia; and (2) processing of personal data of Russian citizens by foreign entities, regardless of where processing takes place, in these cases:

• When processing is based on a contract with a Russian citizen or other arrangement between foreign entities/individuals and Russian citizens; and/or
• When a Russian citizen has consented to the processing of their personal data.

Consequently, online sellers targeting Russian consumers must comply with Russian data protection laws.

Firstly, websites that collect personal data must include a privacy policy. Additionally, any collection, recording, storage and initial processing of Russian citizens’ personal data must be conducted using databases (servers) located in Russia (the “localisation requirement”). To fulfil this requirement, foreign sellers targeting Russian consumers must either own or rent a server located in Russia.

Furthermore, any subsequent cross-border transfer of personal data requires mandatory notification to the Russian data protection authority.

Advertising

Advertising directed at Russian consumers must comply with Russian advertising legislation. This requires advertisements to contain accurate and complete information, with specific requirements in place for certain types of products (e.g. pharmaceuticals, medical devices and dietary supplements). Additionally, certain goods such as alcohol and tobacco are prohibited from being advertised online.

Since September 2022, all online ads targeting Russian consumers must be clearly marked as advertisements and registered with a designated entity known as an advertising data operator (ADO). ADOs are responsible for collecting and transmitting information to the Russian data protection authority about the advertising contract, closing documents, and viewership statistics.

Marketing communications via email, SMS and other electronic means are permitted, provided that prior consent is obtained from consumers. Each consent must be specific to a particular advertiser and given freely, with sufficient information provided to the consumer. For instance, consent may be collected through a dedicated checkbox on the website that must not be pre-checked. Consent for marketing communications must be collected separately and cannot be included within the text of the T&Cs or privacy policy.

Payments

If an online seller offers electronic payment options, including payments via credit or debit cards, online transfers, electronic wallets, mobile payments or alternative currency processors, the seller must have a contract with an accredited payment processing service provider.

Since April 2020, Russian banks have ceased processing transactions from foreign payment systems that lack subsidiaries in Russia and are not listed in the Bank of Russia’s Register of Payment System Operators. Therefore, to accept payments from Russian customers, an online seller must ensure that its payment processing provider is accredited by the Bank of Russia.

Additionally, certain Russian payment systems are not supported outside Russia or operate only in specific countries. However, many Russian citizens use UnionPay or other foreign cards for international payments.

Online sales: restrictions, limitations

Online trade in Russia is regulated by the same rules as in-person trade, with a few exceptions.

First, certain goods are prohibited from online sale, including:

• Alcoholic beverages;
• Tobacco products;
• Narcotic or psychotropic substances and poisons;
• Occult goods; and
• Weapons and other items restricted from civil circulation.

Second, some goods may be sold online but are subject to special regulations. For example, over-the-counter medications may only be sold by licensed pharmacies holding a special permit from the Federal Service for Surveillance in Healthcare.

Conclusion of contract

A seller must conclude a retail sales agreement with any customer expressing an intent to purchase goods under the terms posted on the seller’s website. The offer must provide complete and reliable information about the goods and the seller, including the seller’s name, registration number and address.

A distance sales contract is considered concluded when the seller:

• Receives a message from the consumer expressing intent to conclude a sales agreement; or
• Issues a cash (sales) receipt or another document confirming payment for goods to the consumer.

Consumer protection

Russian consumer protection laws impose specific requirements for online sales, including:

• Before the transaction, the seller must provide information about the basic properties of the goods, as well as the seller’s name, address and other relevant details;
• On delivery, the seller must provide extensive information about the goods, including a full description and details of conformity with applicable technical regulations;
• Consumers have the right to cancel the purchase at any time before delivery and within seven days after delivery;
• Consumers may also cancel the purchase within three months of delivery if they were not informed about the procedure and terms for returning the goods at the time of purchase;
• Consumers cannot return goods with unique properties that make them usable only by the purchaser; and
• If a consumer cancels a purchase, the seller must refund all payments made under the contract within 10 days, minus the cost of return shipping.

Consumers can enforce their rights individually or through class actions in civil court. In addition to civil liability, violations of consumer rights may lead to administrative or criminal liability, depending on the severity of the violation.

SEAMLESS LEGAL
10 Presnenskaya Naberezhnaya,
Block C, 123112 Moscow, Russia
Tel: +7 49 5786 4000
Email: info@seamless.legal
www.seamless.legal

Back to top