FDI-led online market places cannot sell own inventory

E-commerce companies with majority foreign funds have to compulsorily operate as a marketplace, as FDI is allowed only in such models, and not in inventory-based ones, as per the revised e-commerce norms announced by the government.

This is because the current policy allows 100 per cent FDI in marketplace e-commerce activities and not in retail business where the firm has control over the inventory as well. 
The revised e-commerce policy explicitly states that e-marketplace players can’t sell the products of vendors in which they hold stakes. The policy also details who can sell on an e-commerce platform, and the distance that e-tailers have to maintain with their vendors. The norms will come into effect from 1 February 2019.
The new norms are intended to plug some of the loopholes in the foreign direct investment (FDI) norms on e-commerce, the centre has come up with a review policy explicitly stating 
The new norms will bar marketplace players, including Flipkart and Amazon, from selling the products of companies in which they hold stakes, as per a press note issued by the Department of Industrial Policy and Promotion (DIPP) on Wednesday. 
Amazon, which holds stakes in Cloudtail India and Appario Retail, will not be able to sell their wares as per the new policy.
Likewise, Walmart, which owns online marketplace Flipkart, will not be able to sell their inventory online.
Norms have also been tightened around ownership and control over inventory by an e-commerce entity providing a marketplace service. “Such an ownership or control over the inventory will render the business (market-based model) into an inventory-based model. The inventory of a vendor will be deemed to be controlled by the e-commerce marketplace entity if more than 25 per cent of (the total) purchases of such a vendor are (made) from the marketplace entity or its group companies,” the note said.
Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly. 
Marketplace based model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. Digital and electronic network will include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc.
Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis.
The present policy permits 100 per cent FDI under automatic route in marketplace model of e-commerce. FDI is not permitted in inventory based model of e-commerce.
E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services.
“E-commerce entity providing a marketplace will not exercise ownership or control over the inventory, ie, goods purported to be sold. Such an ownership or control over the inventory will render the business into inventory based model. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25 per cent of purchases of such vendor are from the marketplace entity or its group companies,” according to the revised e-commerce policy. 
An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on 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.
In marketplace model goods/services made available for sale electronically on website should clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction will be responsibility of the seller.
In marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.
In marketplace model, any warrantee/guarantee of goods and services sold will be responsibility of the seller.
E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field. Services should 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. Such services will include but not limited to fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing etc. 
Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purposes of this clause, 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.
Guidelines on cash and carry wholesale trading under the Consolidated FDI Policy Circular 2017 will apply on B2B e-commerce, the commerce ministry stated in its release.
E-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only. Such an entity will be required to furnish a certificate along with a report of statutory auditor to Reserve Bank of India, confirming compliance of above guidelines, by 30 September of every year for the preceding financial year.
Subject to the conditions of FDI policy on service sector and applicable laws/regulations, security and other conditionalities, sale of services through e-commerce will be under automatic route.
The revised guidelines will take effect from 1 February 2019.