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FDI In INDIA


As the focus of a potential importer is to penetrate the market via offline and offline retail channels of growth, I have provided below a brief write up the various models of doing so.

If the product categories includes food, socks and shoes, medical devices and medical related products and plans to launch its own brands of food through private labelling through both online and physical platforms, thereby making the sales 3 fold, retail, online and wholesale markets. You must comply with the FDI Policy of 2016.

India’s Foreign Direct Investment Policy of 2016 (FDI Policy), allows a non-resident entity to invest in India, subject to the FDI Policy and except in those sectors/activities which are prohibited. Further the FDI policy provides for eligible investee entities in which Foreign Direct Investment (FDI) is permitted, which are as below:

1.      FDI in Partnership/ Proprietary Concerns;
2.      FDI in trusts; and
3.      FDI in Limited Liability Partnerships (LLP).

FDI in resident entities other than those mentioned above is not permitted. Please note that the foreign investment in sectors/activities under automatic route, wherein the approval of the Foreign Investment Promotion Board (FIPB) is not required, will be subject to government approval where the ownership and or control is not vested in a resident entity.

Proposals involving total foreign equity inflow of and below Rs.5000 crore, would be considered by the Minister of Finance, proposals involving total foreign equity inflow over and above INR 5000 crore would be considered by the Cabinet Committee on Economic Affairs (CCEA).

Models of trading

1.      Wholesale and retail Manufacturer: 100% Foreign investment in manufacturing is permitted under the automatic route, however the products have to be manufactured in India, to be eligible to be sold through wholesale and or retail, including through e-commerce without Government approval. As a result for  to be able to sell products as a wholesale and or retail manufacturer, including through e-commerce, the products must be manufactured in India.[1]

2.      Trading:

a.       Wholesale Trading: Also known as cash and carry trading. The model’s end customers are commercial in nature. i.e. B2B (Business to Business) model of business. FDI is permitted under the automatic route upto 100%. Wholesale trading would include resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales and B2B e-Commerce. The requisite licenses/registration/ permits, as specified under the relevant Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local Self-Government Body under that State Government should be obtained.

Therefore to be able to set up whole trade trading or cash and carry trading, the end customers must be other businesses i.e. only B2B model allowed.

b.      E-Commerce activities: The buying and selling of goods and services including digital products over digital & electronic network i,e, e-commerce, the entity can engage only in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce.

In order to be able to set up e-commerce activities, the end customers must be other businesses i.e. only B2B model allowed. One cannot set up an e-commerce platform i.e. online website to sell directly to customers.

                                                   i.      Inventory based model of e-commerce: Where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly, 100 % FDI under the automatic route is not allowed. Therefore if one is planning on setting up websites to sell directly to customers, and owns the goods so sold, the same model of business is not permitted, and may be subject to approval on a case to case basis.

                                                 ii.      Marketplace based model of e-commerce: Where an information technology platform is provided by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller, 100% FDI is permitted. If one plans to set up a website where one acts as an intermediary between buyers and sellers, the same is permitted.

E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services. E-commerce entity providing a marketplace will not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory will render the business into inventory based model.
c.       Single Brand Product Retail trading (SBRT): 100% FDI is allowed in the SBRT model, however if FDI is over 49% government approval is required, FDI below 49% is under the automatic route. ) Single Brand’ product-retail trading would cover only products sold of a ‘Single Brand’. One can undertake ‘single brand’ product retail trading in the country for one specific brand, directly or through a legally tenable agreement with the brand owner for undertaking single brand product retail trading. The onus for ensuring compliance with this condition will rest with the Indian entity carrying out single brand product retail trading in India. If one wishes to invest beyond 51%, sourcing of 30% of the value of goods purchased, will be done from India.

One is permitted to enter the e-commerce space if single brand retail trading by setting up brick and mortar stores is undertaken.

d.      Multi Brand Product Retail trading (MBRT): FDI upto 51% is permitted under the government approval route. Further the Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded. However the minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.

One can set up shop wherein more than one brand of product is sold, however at least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian micro, small and medium industries.

Please note that Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading, i.e. If one is not allowed to enter the e-commerce space for B2C,  if it sets up shop under the MBRT model.

3.      Pharmaceuticals: 100% FDI is permitted in Brownfield sector (investor investing in an existing plant.) and investment beyond 74% under the government route and in Greenfield sectors (investment in new plants. It is establishing new production capacity by an investor or company) under the automatic route.

However please note that if one is also manufacturing medical devices, FDI up to 100%, under the automatic route is permitted for the same and is not covered under the Brownfield and Greenfield sectors. 
             
Laws on import/ manufacture of products

1.      Food Laws: The regulatory authority in India on food is the Food safety and Standards Authority of India (FSSAI). Recently the FSSAI published the draft guidelines for operation of e-commerce Food Business Operators (FBO’s)[2] i.e. guidelines regulating the e-commerce activity where inventory of food products and food services is owned by the FBO and is sold to the customer directly.

An FBO is any undertaking, whether private or public, for profit or not, carrying out any of the activities related to any stage of manufacture, processing, packaging, storage, transportation, distribution of food, imports and including food services, sale of food or food ingredients.

Comments are awaited on the draft regulations, however an and when they come into force one will need to comply with the registration and licensing requirements, if one plans on selling food products and or services to customers directly via the online platform, whether utilizing the inventory or market based models.

Further all food articles will have to comply with the licensing, registration, food standards, labeling and additive regulations as issued by the FSSAI under various legislations. Applicable food laws are as below:

a.       Food Safety and Standards Act, 2006;
b.      Food Safety and Standards Rules, 2011;
c.       Food Safety and Standards (Licensing and Registration of Food Businesses) Regulation, 2011;
d.      Food Safety and Standards (Packaging and Labelling) Regulation, 2011; and
e.       Food Safety and Standards (Food Product Standards and Food Additives) Regulation, 2011.

 In addition to the above if one will have to abide by the Food Safety and Standards (Food or Health Supplements, Nutraceuticals, Foods for Special Dietary Uses, Foods for Special Medical purpose, Functional Foods, and Novel Food) Regulations, 2015 if the food products fall within the head of “Foods for Special Dietary Uses (FSDU) (other than infants, and those to be taken under medical advice)”.

2.      Legal Metrology Act, 2009 (LM Act): The LM Act and its corresponding rules will apply as one will be importing the products. The Act and rules mandates that every importer and manufacturer has to be registered under the Act before undertaking any activity.  

3.      Bureau of Indian Standards Act, 2016 (BIS): The BIS provides standards for articles which means any substance, artificial or natural, or partly artificial or partly natural, whether raw or partly or wholly processed or manufactured or handmade within India or imported into India. Some standard have been made mandatory while others are voluntary, however they provide the minimal standards to conform to. Further if the BIS mandates certain standards and marking of any article which applied to DS, it may have to obtain requisite licence or certificate of conformity.

Accordingly the BIS will also have to be examined to determine the applicability on ones products.

4.      Drugs and Cosmetics Act, 1940 (DC Act): The DC Act will also have to be analysed to ascertain whether or not the products fall within the definition of a drug, as the regulation and tax rates will defer according to the categorization.



[1] Press Note No. 5 (2016 Series), published on June 24, 2016.
[2] Published by FSSAI vide notice dated September 20, 2016

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