The government has relaxed its foreign direct investment (FDI) rules to allow foreign-funded e-commerce companies to own inventory, as long as this inventory is used for exports of goods manufactured or produced in India.
“An e-commerce entity is permitted to engage in an inventory-based model of ecommerce exclusively for the export of goods/products manufactured and/or produced in India as per the applicable provisions of the Foreign Trade Policy 2023,” the Ministry of Commerce and Industry said in a Press Note.
This officially clears the deck for foreign-funded e-commerce companies like Amazon and Flipkart to purchase products directly from Indian manufacturers, hold inventory, and export goods to overseas customers through their own supply chains.
Under the proposed framework, the existing foreign investment restrictions on B2C and the inventory-based e-commerce model under the FDI Policy will not apply to the export of goods/products.
The proposal will go into effect from the date of notification under the Foreign Exchange Management Act (FEMA).
What do existing FDI e-commerce rules say?
- 100% FDI is permitted in B2B e-commerce and marketplace models, where platforms facilitate transactions between buyers and sellers without owning the products.
- Foreign-funded e-commerce companies can act only as marketplaces.
- Marketplaces are not allowed to hold inventory. They cannot own goods sold on their platforms.
- FDI is prohibited in B2C e-commerce or the inventory-based model, where the platform owns the inventory and sells products directly to consumers.
Why has the government’s proposal triggered backlash from industry bodies?
1. Export-only exception could extend to domestic sales. Ajay Srivastava, founder of trade think-tank Global Trade Research Initiative (GTRI), warned that the export-only exception may not remain confined to exports.
“Once foreign-funded platforms are allowed to own and manage inventory in India, pressure will inevitably grow to extend the same model to domestic sales, a demand global e-commerce companies have pursued for years,” The Hindu quoted him as saying.
2. Segregating export and domestic inventory would be a hassle. Srivastava argued that keeping export and domestic inventories separated will be nearly impossible to monitor in practice.
Praveen Khandelwal, Secretary of The Confederation of All India Traders (CAIT), told Moneycontrol that the existing regulatory framework does not mandate physical audits to ensure inventory segregation. What if export-bound inventory is diverted into the domestic B2C market?
3. Export inventory could be misused. To ensure that export inventory is not misused by foreign companies, Khandelwal called on the government to implement a robust enforcement mechanism.
Both GTRI and CAIT cautioned that, in the absence of adequate guardrails, the export-only exception could open the door for foreign-funded e-commerce companies to…
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