Government eases FDI rules for e-commerce companies aimed at export, first big relaxation in years
The government amended India's Foreign Direct Investment (FDI) policy to permit FDI in the inventory-based model of e-commerce, exclusively where the activity is limited to exporting goods manufactured or produced in India.
The Department for Promotion of Industry and Internal Trade (DPIIT) stated the existing FDI policy was reviewed specifically to facilitate greater exports by Indian sellers through e-commerce channels.
Under the earlier framework, FDI was barred in both Business-to-Consumer (B2C) e-commerce and the inventory-based e-commerce model; this restriction will not apply to the new export-only inventory-based category.
The policy change takes effect from the date of the corresponding notification under the Foreign Exchange Management Act (FEMA).
Industry reaction was mixed — some trade participants welcomed the added regulatory clarity, while others flagged concerns about the relative advantage this may give large foreign-invested platforms over small domestic traders.
FDI Policy in E-Commerce — Marketplace vs. Inventory-Based Models
India's FDI framework for e-commerce distinguishes between two business models, and this distinction is central to how much foreign capital is permitted.
Key Details
- Under Press Note 2 (2018 series), issued by the then-DIPP (now DPIIT) on 26 December 2018 and effective from 1 February 2019, up to 100% FDI is permitted under the automatic route in the marketplace model — where the e-commerce entity merely provides an IT platform connecting buyers and sellers.
- The same policy has historically prohibited FDI in the inventory-based model — where the e-commerce entity itself owns the inventory of goods sold directly to consumers — because of concerns that foreign-funded inventory models could undercut small retailers and violate multi-brand retail FDI restrictions.
- Additional marketplace-model conditions include a cap of 25% on a vendor's sales sourced from any single vendor/group entity, and mandatory annual compliance certification to the RBI.
The new policy carves out a narrow exception — inventory-based FDI is now allowed, but only for goods exported from India, not for domestic B2C sale, preserving the original rationale (protecting small domestic retailers) while opening a new export-promotion channel.
FDI Routes: Automatic vs. Government Route
India's FDI Policy classifies sectors into the automatic route (no prior government approval needed, only post-facto RBI/FEMA reporting) and the government route (requiring approval from the concerned administrative ministry/department).
Key Details
- E-commerce marketplace FDI has been under the 100% automatic route since 2018.
- Multi-brand retail trading FDI (a related but distinct category) remains subject to the government route and a 51% cap, with riparian conditions such as mandatory sourcing from Indian small industries.
- Sector-specific FDI limits and routes are consolidated annually in the Consolidated FDI Policy Circular issued by DPIIT.
Confirming whether the new export-only inventory-based e-commerce category falls under the automatic or government route — and its interaction with FEMA notification timing — determines how quickly foreign-invested platforms can operationalise export-focused inventory models.
FEMA as the Legal Vehicle for FDI Policy Changes
FDI Policy announcements by DPIIT are policy statements; they acquire legal force only once notified under the Foreign Exchange Management Act (FEMA), 1999, typically through amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
Key Details
- FEMA, 1999 replaced the erstwhile Foreign Exchange Regulation Act (FERA), 1973, shifting India's foreign exchange regime from criminal-law enforcement to civil/regulatory management.
- The Reserve Bank of India administers day-to-day FEMA compliance, including e-commerce entities' annual statutory-auditor-certified compliance reports.
- A DPIIT press note announcing a policy change (as in this case) generally precedes the operative FEMA notification, which is the trigger date for actual implementation.
The government has explicitly stated the new e-commerce FDI relaxation will take effect only from the date of FEMA notification — a reminder that DPIIT press notes are policy intent, while FEMA notification is the binding legal instrument.
- FDI in inventory-based e-commerce: now permitted, restricted solely to export of goods made/produced in India
- Governing press note for the base framework: Press Note 2 (2018 series), effective 1 February 2019
- Marketplace-model e-commerce FDI cap: 100% under the automatic route
- Vendor sourcing cap in marketplace model: no more than 25% of a vendor's sales from a single vendor/group entity
- Legal implementation vehicle: notification under FEMA, 1999 (via Non-Debt Instruments Rules)
- Announcing authority: Department for Promotion of Industry and Internal Trade (DPIIT)