It is often remarked that India has tremendous potential as an e-commerce market where global companies are eager to make their presence felt. However, the Indian market has more regulations than other jurisdictions where global players typically operate, requiring them to adapt their business models to ensure compliance with applicable laws.
The recent emphasis in India on the enforcement of foreign direct investment norms applicable to e-commerce companies has meant that global players have to carefully consider their strategy for entry into, and growth in, its market.
The key aspect for foreign companies interested in being part of the Indian e-commerce market is that an e-commerce marketplace with foreign investment is not permitted to control the inventory which is sold on the marketplace. Inventory-based e-commerce entities are not permitted to receive foreign direct investment, and other conditionality served to ensure compliance with this regulation.
However, companies engaged in operating a marketplace for services have some leeway in complying with the norms applicable under the extant foreign direct investment policy in India. Foreign e-commerce companies that are unfamiliar with such restrictions may find that the business model they have adapted in several other countries is not feasible in India. This, among other commercial reasons, would lead a foreign e-commerce company seeking to enter India to consider strategic partnerships for navigating the local market and legal framework.
When strategic tie-ups are structured in this sector; a vital aspect to success is to ensure that both parties are aware of their respective roles in complying with this requirement. This means that the Indian e-commerce recipient of the investment will have to ensure that it remains compliant with the law while remaining competitive.
The strategic investor, on its part, will need to look into the key retailers on the e-commerce marketplace operated by the investee and make certain that all vendors are treated in a fair and non-discriminatory manner. As a result, the ecosystem works to protect the interests of the vendors on the marketplace as well.
Given the importance of the foregoing aspects, the investor’s due diligence in the investee’s compliance with the requirement not to control inventory becomes a vital aspect in structuring strategic deals. An investor therefore needs to undertake a detailed financial diligence of the investee, as well as any other companies in the group that are material to the business, to the extent needed to verify that the operating company does not control inventory sold on its marketplace website. An investor would also have to ensure that the investee’s promoters provide appropriate indemnities and protections in respect of compliance with such laws.
Business contracts that enable the strategic investor and the investee to collaborate also require finesse in negotiating the contracts, particularly as these contracts may also get into the operational aspects, such as the roles and responsibilities of the vendors involved in the operations of the marketplace.
Given the unique regulatory environment in India, and the emphasis to protect local retailers and small businesses, e-commerce companies are increasingly looking at ways in which the e-commerce sector can benefit small businesses by including them in the online ecosystem.
Archana Tewary is a partner at J. Sagar Associates. All views are personal and may not necessarily reflect with the views of this website.