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The Union Cabinet Ministry led by the Prime Minister Narendra Modi gave its endorsement to various amendments to the FDI Policy in a Press note of last year. Foreign Direct Investment (FDI) is a noteworthy driver of financial development and a wellspring of non-debit finance for the monetary improvement of the nation.

According to the press note that was released last December, the following FDI amendments were made during the cabinet meeting:

Single Brand Retail: Existing FDI approach on Single Brand Retail Trading (SBRT) permits 49% FDI under programmed course and FDI past 49% and up to 100% through Government authorization route. It has now been decided to allow 100% FDI under automatic route for SBRT. It has been chosen to allow the single brand retail commerce unit to set off its steady sourcing of merchandise from India for worldwide tasks amid first 5 years, starting 1 April of the year of the beginning of the primary store against the compulsory sourcing prerequisite of 30% of goods from India.

Civil Aviation: According to the existing document, remote carriers are permitted to put under Government approval route in the capital of Indian organizations working planned and non-booked air transport supervision, up to 49% of their paid-up capital. In any case, this arrangement was directly not relevant to Air India, along these lines inferring that overseas aircraft couldn’t put resources into Air India. It has now been decided to get rid of this limitation and enable outside carriers to contribute up to 49% under endorsement course in Air India adhering to the conditions:

1) Foreign investment(s) in Air India, as well as overseas Airline(s), will not surpass 49% in any way.

2) Extensive ownership and effective control of Air India shall continue to be vested in the Indian National.

3) Construction progress: It has been made clear that real-estate broking services do not add up to land business and, thus, qualified for 100% FDI under the automatic route.

4) Power Exchanges: Existing policy accommodates 49% FDI under automatic route in Power Exchanges enlisted under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. Conversely, FII/FPI investments were confined to the secondary market. It has now been made clear to get rid of this arrangement, along these lines permitting FIIs/FPIs to put resources into Power Exchanges through the primary market too.

5) Pharmaceuticals: FDI policy on Pharmaceuticals division among other things imparts that meaning of the medical apparatus as enclosed in the FDI Policy would be liable to alteration in the Drugs and Cosmetics Act. As the definition enclosed in the policy is thorough in itself, it has been chosen to discontinue the reference to the Drugs and Cosmetics Act from FDI arrangement. Further, it has additionally been decided to change the meaning of ‘medical apparatus’ as enclosed in the FDI Policy.

6) Regarding audit firms: The existing FDI policy does not have any arrangements in regard to detail of auditors that can be selected by the Indian investee organizations getting overseas funds. It has been chosen to grant in the FDI policy that wherever the foreign investor desires to determine a specific auditor/review firm having a global system for the Indian investee organization, at that point a review of such investee organizations ought to be done as joint audit wherein one of the inspectors ought not be a part of a similar system.

The FDI Policy, as it remained formerly to these revisions, legalised FDI with no legislative approvals automatic route in units engaged with the commercial centre model of internet business, and denied FDI in substances engaged with a stock-based model of internet business. A commercial centre model was characterized to mean the arrangement of an information technology platform and other frameworks by the internet business element, to encourage transactions among purchasers and vendors. A stock model then again was characterized to mean a model in which the e-commerce business unit has control of goods, and directly pitches to buyers on a B2C basis.

The press release of 2018 by the Department of Industrial Policy and Promotion (DIPP) adds further subtlety to existing policies administering the e-commerce business division. Through a press release dated 3 January 2019, the Government demonstrated that the modifications ought to be seen as being explicatory in nature rather than new decree, and driven by grievances that specific internet business commercial centres were not agreeing to existing rules.

Many startup company owners have expressed that the government’s most recent FDI amendments in commercial centres are “unclear” and are not serving the cause for huge numbers of the startups in India.

The Government in the recent few months has been aggressively trying to plug escapes in the start-up ecosystem to ensure that only genuine businesses get the perks of tax saving and angel investments. With digitization and foreign investments strengthening our startup network, there are many more funding routes available now than what was accessible to startups in India years ago. With this boom, several creative ways came to be devised to clandestinely convert black money to a regular investment, under the garb of lending to startups.

The most recent addition to the host of regulations that have come to be enforced on start-ups is the mandatory requirement to update details such as the pictures of the office from inside and outside, latitude, longitude etc. In this post, we highlight the requirements under Form 22A (Active Companies Tagging Identities and Verification), for active status verification of a company.

Applicability:

Every company incorporated on or before the 31st December 2017 shall file the particulars of the company and its registered office, in e-Form ACTIVE (Active Company Tagging Identities and Verification) on or before 25th April 2019. It is free of cost to do so till this due date, after which the form can be filed only after paying a penalty of Rs. 10,000 to the Registrar of Companies.

What happens when the form is not filed?

If no request for recording the requisites is received, such companies are marked as “ACTIVE-non-compliant”. Such companies are barred from filing the following forms:

1. SH-07 (Change in authorized capital);
2. PAS-03 (Change in paid-up capital);
3. DIR-12 (Changes in director except for cessation);
4. INC-22 (Change in registered office);
5. INC-28 (amalgamation, de-merger)

Details required to be filed to retain the ‘Active’ status:

1. Name of the Company and CIN
2. Registered address of the company
3. Two photographs of the registered office of the company. Photograph of the Registered Office showing external building and inside office also showing in the picture, at least one director/KMP who has affixed his/her Digital Signature to the form.
4. Location of registered office on the map defining Latitude / Longitude
5. Email for OTP verification
6. Details of:
   • Directors, DIN, and status of DIN
   • Statutory Auditor (PAN, Firm number, the period of appointment, etc)
   • Cost Auditor (if applicable)
   • Company Secretary (if applicable)
   • CEO or Managing Director
   • CFO (if applicable)
   • SRN Number of AOC 4 / MGT 7 For FY 17-18

While the issue of receipt of tax notices by angel investors and businesses is still not fully settled, this move is being seen as rather unnecessary by the start-up ecosystem. For a shell company that is ingenuine, it may not be hard to fake a picture and find the coordinates of an office address that it may have mentioned already in its other documents. For others, there exist several documents like tax returns, financial statements, ESI and other forms already filed with the RoC. Thus, the effectiveness of such a regulation in identifying proxy companies remains to be seen.

A Government document released in December last year mentions that India’s e-commerce market is growing at an annual rate of 51% every year and is expected to reach US$ 200 billion by the end of the year 2026. This makes India’s growth in e-commerce one of the highest in the world. In this post, we look at the factors that have contributed to this upward trajectory in e-commerce sales and also mention laws and regulations applicable to the sector.

Towards an upward spiral – What factors gave a boost to India’s growth story in e-commerce?

1. Government policies: Since the year 2014, the government has bolstered investment and setting-up of units in the e-commerce segment through a host of initiatives such as Make in India, Startup India, Skill India and Innovation Fund.

2. Digital payment options: A necessary utility for making online transactions, the growth in number and the quality of digital payment options have greatly enhanced the ability of the Indian shoppers. While government-owned BHIM is one such trusted app, it is PayTM that enjoys maximum revenues and user-base. Demonetization can also be loosely traced as one of the reasons, as it has led to a large chunk of population shifting to online payment alternatives.

3. Internet penetration: The increase in the number of smartphone users alongside massive leaps in connecting remote villages through the Digital India program have also led to a growth in sales in the e-commerce business.

4. Consumer wealth and literacy: Other factors that have contributed to an increase in the online business are the efforts to enrol more children in schools and enhance the level of literacy in adults through various programs. The rise in living standards and the emergence of young-elite middle-class professionals also contributed.

FDI Regulations: Inventory-based and market-place based models of e-commerce – What are they?

As the current FDI policy stands, there is no prohibition in seeking investments for the market place model for e-commerce; however, the inventory-based model continues to be heavily regulated with no scope for foreign investment in the same. In a market place model, the e-commerce platform, akin to a market, merely provides a platform for buyers and sellers to interact and may also provide the necessary services like packaging, shipping and delivery. Some of the classic examples are Amazon and Flipkart, which do not have goods of their own but offer services to sellers to reach out to a large base of customers. However, in an inventory-based model, the online company owns good and may also sell them under its own name while taking care of the entire process from procurement of goods or manufacture to actual delivery.

Examples of this type are PepperFry and Jabong.

While a marketplace model is highly scalable as it can encompass a wide variety of goods, it suffers from quality concerns due to the presence of a large number of sellers. In an inventory based model, there is greater control, access to resources and hence, the ability to derive huge profit margins. There can also be hybrid models involving a combination of both inventory and market traits, however, unless an entity is a 100 percent market place style, it cannot raise foreign capital.

Indian Contract Act: What happens to warranties and guarantees in online retailing?

The FDI policy has clarified that the e-commerce company operating in the marketplace model will not bear any responsibilities of warranties. The warranty/guarantee of products or services sold online will be borne by the sellers themselves. This means that while setting up an online retail company, your contracts must mandatorily include a clause transferring the onus of meeting such obligations on the sellers. However, in limited cases, there may be some liabilities that may still ensue on the retailer.

FDI policy for manufacturing entities

The FDI policy provides that a manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce, without Governmental approval. Thus, manufacturing entities selling their products on e-commerce retail can accept FDI up to 100% under the automatic route.

FDI policy for trading entities

For those businesses that are engaged in B2B trading – which may be in cash or wholesale trading, a 100 percent automatic approval route FDI is permitted. Although it excludes any retail sales, selling to industrial, commercial, institutional and professional business users are considered wholesale customers, even if they might be consumers.

FDI prohibition in multi-brand Retail Trading (MBRT) business

There is a complete prohibition on e-commerce presence by those entities which have FDI in the multi-brand retail trade. Multi-brand retail trading is a concept which means selling a bouquet of brands under the same chain (example, Shoppers Stop selling Arrow, Flying Machine, Biba, Titan – all under the same roof) and has been rather controversial. Although states and union territories are free to choose whether to implement this prohibition or not, the protectionist sentiment in the government towards small retailers continues to affect this restriction.

FDI policy in single-brand retail trade

Very recently, in January 2018, the government has permitted 100% FDI under automatic route in entities engaged in single-brand retail trading. This not only has the potential of improving supply chain and access for brands but also limits the time, cost and filing procedure for foreign entities trying to enter the Indian market.

Consumer Protection Act – Uniform applicability on all business models

Regardless of the type of business model, the Consumer Protection Act will still apply to the retailers and sellers. The most recent case is of Amazon having to pay a penalty of a few thousands for incorrectly displaying the price of a laptop, which was ordered by a Consumer Court.