E-COMMERCE LAWS IN INDIA: FOREIGN INVESTMENT AND RETAIL TRADE

Any business activity conducted on an electronic platform through the internet would fall under the purview of e-commerce. Such business activity could be conducted between a manufacturer and consumer directly or could go through the route of manufacturer-wholesaler-retailer-consumer.

While Indian Laws are yet to introduce a statutory definition for e-commerce, the concept essentially is the same as that of a traditional business; except that all aspects of an e-commerce transaction are conducted virtually. Examples include purchasing products online and having it delivered physically or purchasing e-books/software online and directly installing the same on an electronic device.

Foreign investment in E-commerce:

Foreign Investment in e-commerce is governed by the Foreign Exchange Management (Transfer or issue of any security to a person resident outside India) Regulations 2000[1] (“FDI Guidelines”) as amended from time to time. The regulations pertaining to e-commerce was first introduced in 2000[2] whereby a foreign investor was allowed to invest in upto 100% in the shareholding of an Indian operating company conducting e-commerce activity, provided that at least 26% of the said shareholding would be divested in favour of the Indian public within 5 years of making such investment. The condition of divesting would only apply if the shares of the foreign investor were listed in stock exchanges abroad.

The condition of compulsory divesting was removed in 2006[3] and the extant FDI Guidelines on e-commerce stand as follows:

Equity	Route	Restriction	Applicability
100%	Automatic	Company cannot sell directly to the ultimate consumer. Only allowed to conduct B2B i.e. Business to Business sales.	Any sector in which foreign investment is not prohibited. Sector specific conditions that apply to domestic trading would apply to e-commerce. Exception: Single brand and multi brand retail trade. An Indian operating Company having investment from a foreign brand is absolutely restricted from participating in e-commerce activities.

Difference between B2B and B2C: B2B is a transaction between two businesses i.e. between a manufacturer and wholesaler or a wholesaler and retailer. However a B2C i.e. Business to Consumer transaction directly involves the ultimate consumer and no further sale of the product takes place. A B2C or a B2B transaction need not necessarily involve a manufacturer. It could be between wholesalers, retailers and consumers.

Other Restrictions:

In addition to the applicable foreign exchange laws, it is pertinent to note that all companies involved in e-commerce activities are compliant with all other applicable regulations governing e-commerce, some of which are discussed below[4]:

Contract Laws: All purchases made online would be governed by the Indian Contract Act, 1887. Acceptance of the “terms and conditions” prior to any purchase made online creates an implied contract between the purchaser and the seller. These are called clickwrap contracts i.e. contracts created by clicking on an “I accept” tab. Browsewrap is also a recognized form of an implied contract which is created by the mere browsing of a website. Therefore all principles of contract law would apply to an e-commerce transaction, including the principle of void ab initio (eg. contract with minors), undue influence, fraud etc., all of which may come into play in case of a dispute. Some issues that may arise out of e-contracts is the inability to have it stamped, thus rendering the contract inadmissible as evidence in a court of law. Further, the e-contract in itself may be held unconscionable for providing no option of negotiation. Indian jurisprudence has little guidance to offer on this matter.

Data Protection: The Information Technology Act, 2000 and rules issued thereunder[5] have provided a framework for protection of personal information as well as sensitive data such as passwords, bank account numbers etc. The regulations essentially set out compliance requirements relating to privacy policy, reasonable security practices etc. engaged in e-commerce must comply with in order to achieve data protection.

Payment Gateway: Online payments governed by the Payment and Settlement Systems Act, 2007 are effected through a payment system i.e. a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them. All entities operating a payment system must be authorized by the RBI. Furthermore, the RBI recently issued a circular mandating all companies that route their billing internationally for purchases made using an Indian card to have a second factor of authorization and route payments through India.

Conclusion – Options available to foreign investors: 

The Finance Minister in his budget speech on 10^th Junly, 2014[6] announced that the government is considering opening up the e-commerce route for foreign investors in the manufacturing sector looking to sell their products/services through B to C i.e. Business to Consumer.

It is pertinent to note that the aforementioned modification only allows manufacturers to sell directly to consumers, and FDI with respect to wholesalers and retailers selling directly to customers is still prohibited. Therefore, in addition to having to comply with the aforementioned regulations on contract law, IT act etc., foreign investors face the important issue of not being able to sell to customers directly owning to B2C FDI in E-commerce being prohibited.

Presently, the following options may be availed by foreign investors who wish to conduct B2C E-commerce activities in India:

Market Place model: Foreign brands are not allowed to sell directly to consumers in India online, however customers are still able to visit their websites and place orders online. This is possible because such online portals use the “Market Place Model” which is essentially setting up a portal that acts as a middleman between buyers and sellers. The Company does not store any inventory and sources all materials directly from the manufacturers based on orders received.

Franchisee: The franchisee model involves appointing a local Indian franchisee to operate the business/brand of the foreign investor. There is no restriction on an Indian owned franchisee to engage in B2C e-commerce activity. Further, the relationship between the foreign company/brand and its franchisee would constitute as a B2B activity. However, the foreign investor would not be allowed to acquire shareholding in the Indian franchisee conducting such e-commerce activity.

FIPB permission: The Company has the option of applying to the Foreign Investment Promotion Board (“FIPB”) for permission to conduct e-commerce activities outside the purview of the existing regulations. The FIPB will examine the proposal and may grant permission on a case by case basis.

[1] Issued under the Foreign Exchange Management Act, 1999

[2] Vide Press Note 7 (2000) Series issued by the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry on July 14, 2000

[3] Vide Press Note 4 (2006) Series issued by the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry on February 10, 2006

[4] It is pertinent to note that only a few handpicked regulations are discussed below. There are various other applicable legislations and issues pertaining to e-commerce such as criminal laws, other aspects of Information Technology laws etc.

[5] “Reasonable practices and procedures and sensitive personal data or information Rules, 2011” issued under Section 43 of the Information Technology Act, 2000

[6] The said conditions are proposed to be modified and have received the Union Cabinet approval for the same. Official RBI notification on the same is pending. Print Release can be found at http://pib.nic.in/newsite/PrintRelease.aspx?relid=106968

(The Author was an Associate in the Corporate Team,  Jayanth Pattanshetti Associates, Bangalore)