Market focus: e-commerce legislation in India

E-commerce is booming in India and there are great opportunities for international companies in this market. However, in recent years, the Indian government has imposed various restrictions on foreign companies wishing to sell online in India. What do you need to comply with if you want to profit from one of the world's largest online markets? How do you go about it?

Indian e-commerce market grows explosively

With more than 759 million Internet users, India is the world's second-largest online market. It is estimated that there will be more than 900 million Internet users in the country by 2025. During the pandemic, Indians switched en masse to e-commerce platforms for their daily purchases. This further boosted the country's e-commerce market.

Consultancy Bain & Company expects the market size of the Indian e-commerce market to increase from about $30 billion in 2020 to $350 billion in 2030. 

Not for nothing are retail giants such as Amazon and Walmart betting heavily on India. Jeff Bezos recently promised to invest another billion dollars in India, and Walmart further expanded its majority 60% stake in Indian e-commerce market leader Flipkart, with a $1.2 billion investment.

To curb the influence of these American mega-corporations and provide as much transparency to consumers as possible, the Indian government has introduced special regulations that you, as a foreign investor, must consider.

The rules for foreign companies in the Indian e-commerce market 

Since 2015, 100% Foreign Direct Investment has been allowed in the Indian e-commerce market, but that does not mean that every foreign company can open its own webshop and start selling to Indian consumers. The Indian government applies two different models within the e-commerce market with specific rules and restrictions for foreign investors:

The inventory model

In the inventory model, which we know from companies like Amazon or Bol.com, goods and services are owned by the e-commerce company and then sold directly to the customer. The e-commerce company thus owns the inventory and the platform on which the goods are sold. 

Current Indian regulations do not allow Foreign Direct Investment in the inventory model. This means that a foreign company cannot run a web shop in India on which it sells goods and services from its own inventory, because the regulations do not allow a foreign company to own 100% of the sales platform and of this inventory. 

However, there are exceptions to this rule. A foreign entity may hold up to 49% of the shares of an Indian e-commerce platform with an inventory model if: 

• Made in India productsare sold on the platform;

• The founder is an Indian national;

• The company is run by Indian management;

• The company raises funds domestically, allowing large Indian companies to reinvest in new start-ups in the sector.

The marketplace model

In the marketplace model, the e-commerce entity only owns the online platform and is therefore the facilitator between sellers and buyers. In addition, the e-commerce company may provide support services to its sellers such as logistics, warehousing, call centre and payment collection.

In the marketplace model, 100% Foreign Direct Investment is allowed and foreign companies are thus allowed to fully own an e-commerce platform, as long as they do not own the inventory. But more rules apply to foreign-owned e-commerce platforms:

• E-commerce platforms are not allowed to sell products from companies in which they have shares; 

• The e-commerce entity may not exercise any influence or ownership over the goods/services sold on the platform. For example, an e-commerce platform cannot take the initiative to offer products at deep discounts; the company is then automatically seen as an e-commerce entity with the inventory model, with all its consequences.

• A company selling through an Indian e-commerce platform may not contribute more than 25% of the platform's total sales.

• Online exclusive brands are not allowed. It is prohibited for an e-commerce entity to make exclusive arrangements with a seller to sell its products exclusively on one platform. 

• The seller's name & contact details must be on the website.

• After-sales activities are the sole responsibility of the seller. The entity operating the e-commerce platform may not offer this service.

Consumer Protection Act 2019

In late July 2020, the Indian government presented a new law with obligations for e-commerce retailers. The Consumer Protection Act 2019 should provide consumers with more transparency into the company and its products so they can make informed decisions.

E-retailers will therefore be required to include details about returns, refunds, exchanges, warranty, delivery and shipping, payment methods and complaint mechanisms, and the "country of origin" on their platform starting in 2020. The indication of the country of origin must also appear on the products themselves. 

International companies offering their goods and services in the marketplace of an Indian e-commerce entity must provide the above information to that entity.

E-commerce platforms are required, starting in 2020, to provide consumers with as much data as possible about the sellers on their platform. Such as the company's name, address, customer service number and any reviews or other feedback about the seller or products.

Finally, the product must state the "total price" along with any hidden additional costs such as shipping costs, and platforms must not "manipulate" the price of the goods and services offered to make unreasonable profits.

The e-commerce rules are enforced by the Central Consumer Protection Authority (CCPA) in India, and violations of the new act carry hefty fines. Therefore, make sure your entity in India is always compliant with the latest regulations.

Not sure if you are fully compliant? Our experts will run a check for you and give you clear next steps so you are back up to date.

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Praveen Singal

Financial advisor - IndiaConnected

This article was written in collaboration with IndiaConnected's financial advisor, Praveen Singal.

Singal has over 25 years of experience in establishing successful business strategies for European companies looking to start up in India, corporate financial analysis and compliance.

He is also a qualified Chartered Accountant with a specialization in Indian taxation.

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The corona crisis has accelerated India: these developments you need to keep an eye on as a European company

The Indian lockdowns made doing business in the country difficult for a few weeks: mass homeworking, disrupted export chains and production lines that came to a halt. But at the same time, a lot of new, enduring habits also developed that actually offer companies interesting opportunities in the long run. At least, if you know where to look. Shashank Verma, head of Sales Order Management for Maier + Vidorno, IndiaConnected's partner in India, shares which sectors you should keep a sharp eye on in the coming period.

From cash to online payments: e-commerce is booming

According to Verma, India had to make a big switch when the Modi government announced the first lockdown in mid-March. "India got locked down at home in one fell swoop, so everything, even groceries, had to be delivered. This has made online shopping commonplace in India overnight. We are even seeing an increase in online car sales. Normally here in India we go to big shopping malls a lot, but now everyone tries to stay away from big crowds as much as possible. Online shopping is the efficient and safe solution and it will certainly remain the preferred option until a vaccine is found." 

Despite the fact that in India it is quite normal to pay cash at the door for your product ordered online, the big online platforms like Amazon India, BigBasket, Flipkart and Zomato soon stopped accepting cash. They thereby pushed consumers to switch to online payment apps like Paytm. According to Verma, this is a very important development for companies looking to explore the Indian e-commerce market. "A cash payment normally has disadvantages for a company. The seller has to pay extra tax if cash is received and cannot, for example, charge for delivery if the customer refuses the product at the door. These drawbacks are falling away as online shopping and online payment become the new normal in India."

'India is going to knock China off its throne as the best place to manufacture'

Until the outbreak of the COVID-19 virus, entrepreneurs quickly thought of China when outsourcing their production, but the current situation shows that it is smart to spread the opportunities. Fokker Elmo did that by not starting a second factory in China, but by building a new one in India. They are reaping the benefits of this during this crisis. Verma sees that the Indian government also wants to grasp this opportunity with both hands. "One of the big challenges if you want to manufacture in India is to buy industrial land. The states have therefore all been instructed to look for land that can be made available for this purpose and with success. In total, an area twice the size of Luxembourg is now available for manufacturers who want to move from China to India or open a second manufacturing facility."

"Also, India wants to raise its profile as an export country," Verma says. "We will therefore see regulations relaxed for companies that do produce in India, but do not enter the Indian market with their products. A prime example is General Motors, they have stopped selling in India since 2017, but still produce for export." The new, Indian PLI subsidy further endorses this endeavour. Smartphone manufacturers can use this scheme to move their production to India in a very cost-effective way. "Apple is therefore already coming this way and we hear rumours that Samsung may also expand its factory. This success has whetted the appetite of our government for more, so I expect there will be incentives for other sectors as well."

India wants technological solutions that limit human contact

According to Verma, the outbreak of the coronavirus in India has increased the need for self-service options. "Companies that have technological solutions that reduce the need for human contact for simple daily tasks such as filling up with fuel, washing the car or checking out, should certainly look into the Indian market. Because of the current situation, the interest in solutions that can be done independently or even remotely is high. And this applies not only to consumers, but also, for example, to the distribution, agriculture and medical sectors."

Verma also expects India to be able to offer international companies more in this area. "We normally see many young, intelligent and technically skilled Indians leaving for abroad, but the corona crisis has prevented that from happening. So there is less 'brain drain' at the moment and this group would like to develop within an international organisation. This will create a win-win situation for companies looking for motivated and ambitious talent." 

Vocal about local and let's make it global'

The Indian Government's support plan to lead the country out of the corona crisis sounded very isolationist. President Modi encouraged his country to buy as many Indian products as possible: 'be vocal about local'. "Yet international companies need not worry about their position in the country, India is very keen to bring in more foreign investment," says Verma. "India normally imports billions of products from China and the outbreak of the virus has brought home to us the fact that we need to be less dependent on imports. So the statement 'vocal for local' is not to deter companies from coming to India, but to encourage Indians to produce more products domestically. At the same time, we see the arrival of foreign companies as a great opportunity for our country."

Wondering what opportunities exist in India for your business?

E-commerce in India to double in three years

With around 690 million active internet users India is the second largest online market in the world. The e-commerce industry in the country is growing like crazy; in the past three years, the market's turnover has doubled from 20 to over 40 million dollars. And in a nationwide survey in the early 2020s 74% of Indian internet users indicated that they had made at least one online purchase in the past month. This makes it extremely interesting for web shop giants such as Wal-Mart, Alibaba and Amazon, which are investing billions in India. The corona crisis has not yet put a spanner in the works.

Photo: Bruce Mars

The impact that the global COVID-19 outbreak, and the Indian lockdown that followed, will have on the country's economy is only a forecast at this point. But what is already clear is that India's e-commerce sector is benefiting from the lockdown so far. Indians can no longer go to supermarkets or malls and are therefore suddenly buying their daily products online in large numbers. "We are seeing a surge in orders, which increased by about 20-30% in March, and we expect online shopping to grow even faster in the coming months," said Vipul Parekh, one of the founders of BigBasket, India's second largest online supermarket. 

A webshop in India is crucial

Online selling in India was also opened up to international investors by Modi in 2016. Since 2019, Foreign Direct Investment (FDI) is allowed, which means that selling is now not only allowed B2B, but also B2C. In simple terms, since 2019, foreign companies are allowed to sell directly to Indian consumers, and the American giants didn't let them say that twice. Wal-Mart bought Flipkart, the largest online department store in India, Apple announced in January that they would no longer sell their products through resellers but through their own online store, and Amazon CEO Jeff Bezos even went on a state visit to India. He promised to invest billions in 'digitising medium and small businesses in the country'. Expectations for the Indian e-commerce market are high: a growth of another 50% in the next 4 years and a number 2 position as the largest e-commerce market in the world by 2034. But not only these American mega-companies can benefit from this. 

Dutch companies such as Hunkemöller and Scotch & Soda also know that having a webshop in India is crucial. They have both benefited for years from the rapid growth the retail sector is experiencing online. Online apparel sales are the main driver of growth in the Indian e-commerce sector, accounting for about 40% of total e-commerce sales by 2020. That amounts to about $16.5 million. According to the Mckinsey Global Institute, the online retail sector has the potential to grow 12x in revenue over the next five years. Hunkemöller and Scotch & Soda both give new Dutch entrepreneurs in the Indian market the same advice: "Make sure you have a good and reliable local partner. 

Logistics and distribution in India

Entering the Indian e-commerce market has its own challenges. Two of the most important are the distribution of the products and the payment by the customer. Although the introduction of the Goods and Services Tax has made it easier to transport products from state to state, it has not solved all the logistical problems. For instance, in many large cities such as New Delhi, Bangalore and Hyderabad, large commercial traffic is not allowed to enter the city during rush hours. In addition, the Indian road network is currently undergoing major reconstruction, which not only leads to more congestion but also to higher tolls.  

Especially distributing products to remote locations inland is still a challenge. For this reason, large international players such as FedEx and DHL often have to work together with small, local parties to actually deliver the package to the doormat. So having a local partner to set up your distribution network is essential. Only if you know the rules of the different states and know who the right players are within those states, can you offer the service that the Indian customer expects. 

Online payments grow through corona crisis

Finally, payment also presents a challenge in setting up a successful webshop in India. Indian consumers still prefer to pay cash to the deliverer of the package and not online. And there are disadvantages to this: the seller has to pay extra taxes when paying in cash and the customer cannot be held responsible for the delivery costs if he or she refuses the product at the door. Yet the corona crisis seems to have caused a turnaround; last month, the number of online payments via the Indian Tikkie, Paytm, went up by some 20%, after the Indian National Bank launched a campaign to encourage people to bank online as much as possible.