A consolidated policy on Foreign Direct Investment in India released today (pdf) finally addresses one of the key questions around investment in e-commerce ventures in India, and also clarifies on the distinction between wholesale and retail ventures. The policy allows 100% FDI in business to business e-commerce ventures, but not in retail trading ventures. B2B ventures are those which fulfill any one of the following four conditions:
(a) Full records indicating all the details of such sales like name of entity, kind of entity, registration/license/permit etc. number, amount of sale etc. should be maintained on a day to day basis.
(b) Wholesale Trading of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture
(c) WT can be undertaken as per normal business practice, including extending credit facilities subject to applicable regulations.
(d) A Wholesale/Cash & carry trader cannot open retail shops to sell to the consumer directly.
For wholesale ventures, “requisite licenses/registration/ permits, as specified under the relevant Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local
Self-Government Body under that State Government should be obtained.”
Important: The key element of this policy is the definition of what constitutes wholesale trading: that for wholesale trading to group companies may only take place if it does not exceed 25% of the total turnover of the wholesale venture. This is a clarification policy that might put many e-commerce ventures which have raised venture capital funding, in the dock, because of the structuring of some of the investments. Typically, since investment in front-end retail (i.e. B2C) has not been allowed, venture capitalists have invested in wholesale retail ventures, which in-turn sell the goods to the front end retail venture.
Thus, such investments are not in line with India’s FDI policy, and it’s possible that the wholesale ventures will have to start selling goods to other vendors in order to remain in conformity with the law. There could be other structures for funding – for example, an investment in the technology company that powers the platform for the e-commerce venture, in which case the investment method is kosher.
The policy on trading, in full: