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Recent Relaxations in FDI Policy for E-commerce in India (2024–25)

  • May 14
  • 11 min read

Introduction: E-Commerce and FDI in India


Foreign Direct Investment (FDI) in its legal context as referred to in the Indian context is a capital contribution by a foreign person, in an unlisted Indian company or through the acquisition of at least 10 % of the equity shares of a listed company.[1] In India, the nodal agency in terms of formulation and administration of the FDI policy, along with the sectoral caps, entry routes, and conditions under which FDI may be accepted is the Department for Promotion of Industry and Internal Trade (DPIIT).[2]


The emergence of e-commerce over the last ten years has changed the retail scene in India and drawn large amounts of foreign investment through sites like Amazon, Flipkart, and Meesho. The recent expansion in the internet economy has stimulated regulators to take a turn towards serious examination of ownership models, pricing mechanisms, and safeguarding of the small local business.[3] Since the issuance of Press Note 2 (2018), India has allowed 100% FDI under the automatic route only for marketplace-based models and has prohibited inventory-led operations[4].


The increasing investor interest in new forms of business-like quick commerce, and the growth of private labels, along with the growing external trade pressures, have brought new consultation and the formulation of proposed frameworks to review some of the features of FDI policy in e-commerce. Even though a new Press Note has not been released yet, significant legal and compliance changes, chief of which is the introduction of the FOCE (Foreign-Owned and Controlled Entity) classification and the reclassification of FPI into FDI, are transforming the policy environment[5].


This blog questions recent changes in the FDI policy of India in relation to e-commerce, the legal justification behind the existing restrictions, the eternal conflict between protecting domestic traders and allowing foreign investment and the difficulties with implementing those provisions in practice.



Overview of Legal Framework for FDI in E-Commerce


In India’s e-commerce sector foreign direct investment (FDI) is primarily governed by the press note issued by the Department for promotion of industry and Internal Trade (DPIIT) and rules established under the Foreign Exchange Management Act, 1999 (FEMA) and its implementing regulations. Press note 3 of 2016 and Press note 2 of 2018 are the two most important instruments identifying the boundaries of acceptable foreign investment in e-commerce out of the series of measures issued by the Indian Government.


As notified in Press Note 3 of 2016[6], the first major step taken to formally regulate the FDI in e-commerce space. The two clear definitions of the key models were introduced as –

Inventory-based model, where the B2C is followed as e-commerce entity itself owns the goods and directly sells them to the customers. And, Market-based model, where the B2B is followed meaning the e-commerce entity is only responsible as the platform or facilitator between the buyer and sellers without owning the goods and services.


While the policy permitted 100% FDI under automatic route for marketplace- based models that is B2B, On the other hand it has expressly prohibited FDI in inventory-based models. Additional Conditions were also laid down in the policy to prevent indirect violation of these restrictions-


  • No more than 25% of sales by a vendor could be made to a single e-commerce entity or its group companies;

  • The platform must not directly or indirectly influence the price of goods or services offered by sellers;

  • The e-commerce entity was to act solely as a platform and was prohibited from owning inventory.


These rules were designed in a way that prohibits unfair practices by the foreign-invested platforms who try to dominate the market of retailers with the help of unfair market advantages. It makes sure that such platforms remain neutral middlemen between the buyer and seller.


To increase the compliance and reduce the currently existing loopholes the Press Note 2 of 2018[7] was published with more detailed and strict anti-avoidance provisions. The regulation aims at emphasizing the difference between the two models of e-commerce and enhancing the implementation of the FDI limitations. 


  • An e-commerce platform will be deemed to operate as an inventory-based model and hence be ineligible for FDI, if it has ownership or control over inventory, even indirectly;

  • A seller shall not be permitted to sell on the platform if the e-commerce entity or its group companies hold equity stakes in such a seller;

  • Exclusive arrangements between the e-commerce entity and sellers were prohibited to prevent preferential treatment;

  • No more than 25% of a vendor’s purchases may be sourced from the marketplace or its group entities;

  • E-commerce entities with FDI were required to furnish a compliance report certified by a statutory auditor to the Reserve Bank of India (RBI) annually.


Such provisions are specifically meant to be used to ensure that platforms do not take sides in such a way as to encourage the creation of indirect inventory models through controlled vendors or exclusive arrangements.


The above-mentioned Press Notes both press note 3 and 2 operate within the larger framework of FEMA and the Non-Debt Instruments Rules, 2019, which govern foreign investment into India. As clarified in the FAQs on FDI Policy issued by the DPIIT, the current FDI policy:


  • Permits 100% FDI under the automatic route for marketplace-based e-commerce;

  • Continues to prohibit FDI in inventory-based models;

  • Requires all FDI-related investments to comply with the relevant conditions under


Schedule I and Schedule II of the NDI Rules[8];


Additionally, policy considers indirect foreign investment such as downstream investment in India entities as a component of foreign direct investment and it is subjected to compliance audit consisting of sectoral limits, access channels, and price regulations.


The government of India introduced the Foreign Direct Investment (FDI) policy back in 2020 that was an initiative to introduce a more orderly and regulated environment of influx of the foreign seekers in the electronic commerce sector. The FDI policy of 2020 introduced some of the essential reforms in the current regulatory framework that governed e-commerce in the country. Among the main points we could mention:


Such FDI e-commerce entities are only permitted to indulge in business to business (B2B) e-commerce but not in business to consumer (B2C) e-commerce.

FDI up to 100 percent is permitted through automatic route in the market place model of e-commerce only which involves working as a platform to create a marketplace between buyers and sellers.


  • FDI in inventory-based e-marketplace where the e-marketplace platform has inventory of vendors and sellers and also sells directly to the customers continues to be capped. E-commerce using FDI funds are not allowed to exercise ownership or control of goods in its stores. Third-party vendors can only get a platform through them. It states that inventory vendors are considered to be under the control of e-commerce entity in the event of the purchase of greater than 25 percent by purchaser of such vendor being made by e-commerce entity or group entities.

  • Platforms cannot sign agreements with sellers whereby they may come up with exclusive sales channels.

  • E-commerce entities were not allowed to interfere with the prices of the products that were retailing in their sites.


An Effect of the 2020 FDI Policy


The policy was expected to provide a level playing field among the domestic as well as the international players. The policy attempted to exclude excessive power of e-commerce giants on the market by not allowing them to control inventory and set the prices on the marketplace entity.


The local retailers and the SMES welcomed the 2020 policy. The ban on pricing and requirement control in disclosure of selling parties and warranties/ requirement of guarantee was done to protect consumer interest.


The 2020 FDI policy resulted in the reconstitution of business models of a lot of e-commerce establishments. Most e-commerce retailing reorganized their business to meet the new directions.


The 2020 Foreign Direct Investment (FDI) policy can be understood within the current economic environment as a framework that would enable an online retail market that is more open, regulated, transparent, and major progress towards the development of e-commerce in India. This strategy aimed at responding to the booming nature of the digital economy is intended to find a balance between protective policies on domestic competition and consumer welfare with the benefits of foreign capital inflow.

 

Recent Developments in FDI Policy (2024-2025)


Ever since its origin, the current policy frameworks have also subjected all foreign direct investment (FDI) into India to strict regulatory scrutiny, the aim being to eliminate the inclination toward unjust business activities by foreign companies. In order to achieve the further preservation of domestic enterprise equity, the Government of India in May 2025 implemented a new form the Foreign-Owned and Controlled Entity (FOCE[9]). This innovation has the effect that any business registered in India will attract the FDI norms regardless of the place of legal domicile in case it is either majority owned by foreign nationals or is effectively controlled by them. The step was clearly aimed at reducing the application of sophisticated corporate vehicles as the means of bypassing sector-based restrictions on foreign investment, especially in the controversial area of online shopping.


Any enterprise in India the ownership or operation of which is under the primary control of foreign entities is a FOCE (foreign-owned Indian company). In the event that a foreign corporation exercises control over decisions, such as designation of directors, establishment of a strategy or direction or manipulation of core operations either directly or indirectly, the enterprise is categorized as a foreign-controlled enterprise even though it may have been formally registered[10].


This term is given special significance in the industry of e-commerce. In the past, some foreign platforms have positioned themselves as simple marketplaces, but they have played an extensive role in selecting products, setting prices, and in controlling inventories. With the introduction of the FOCE framework, such firms are subject to the Indian FDI regulation in the same way as a more overtly foreign-owned investor, effectively eliminating any earlier attempts to indirectly work around the policy.


In November 2024, the Reserve Bank of India (RBI) issued a clarification to investors: any foreign portfolio investor (FPI) who purchases a 10 % or more share in a listed company will have to reclassify such investment as foreign direct investment (FDI)[11]. This reclassification should be undertaken within a period of five trading days and it should be approved by the concerned Indian company in addition to the Government of India in some situations. As soon as it has been achieved, the investment will be cured and notified as FDI despite the fact that it later declined to the 10 % level. The move was initiated to protect the small Indian retailers and local companies. Small stores were being accused of giving preference to certain vendors, providing deep discounts and putting barriers towards entry of small-time sellers in large Internet-based selling platforms over several years[12].


Trade bodies and industry analysts ruled that various foreign players in e-commerce had failed to follow the spirit of the law that was there. Indirect control over suppliers, preferential treatment, and the manipulation of the pricing structure of such platforms in reality provided a violation of the purport of the statutory framework and caused a competitive threat to the domestic enterprises.


The Government therefore stepped in to make it possible to have sustained inflows of external capital but it had to make sure that these inflows have to be equitable, transparent and should not be distortionary.


Rules to Stop Inventory-Based Online Retailing


The major goal of the discussed policies was to reduce online retailing based on inventory. India has since 2016 permitted 100 % foreign investment in marketplace-based e-commerce where the platform only links buyers and sellers. In comparison, direct sale of products to their customers (inventory model) is still forbidden in case of firms with foreign investment.


In 2018, the policies got even stricter:


  • When a seller gets access to over 25 per cent of its stocks through the platform or its affiliates, then the platform is considered to control the seller.

  • Sellers must be independent of platforms, and cannot be owned or controlled by platforms, and platforms must not grant undue advantages to sellers.

  • Companies have no control over the prices of items sold on their site.

  • The services which include delivery or storage or advertising must be on offer to all the sellers and in a non-discriminatory manner.


In spite of these provisions, there were platforms that tried to find methods to avoid them. They started plans with preferred sellers or affiliate companies that were favored and could enable them to evade the inventory ban without outright violating the regulations.

 

Challenges in Following the Rules and Legal Loopholes


Although the clarity has been established, compliance to the existing provisions has not been easy. It has been empirically determined that some of the most notable businesses have come up with new mechanisms that defy pertinent statutory requirements.


Examples are: The creation of subsidiary companies by different platforms, which supposedly operate as independent merchants, but are managed by the mother company. Giving special discounts or marketing support to a few sellers thus disrupting the competitive balance. Cases where over 25 % of the turnover on a platform was generated by a single merchant, which according to the current standards was explicitly prohibited[13]. Such developments led the Competition Commission of India (CCI) and other relevant authorities to conduct investigatory investigations to establish whether the firms have conductively exerted dominant power over the resellers and whether such powers are restricting new entries[14].


Accordingly, the Reserve Bank of India has learnt of several cases where the foreign investors exceeded the shareholding limit of 10 % but they are still under the FDI limit and hence the need to introduce the reclassification rule in November 2024 where all large foreign investments are reported appropriately to the regulators[15].


Conclusion


The way that the e-commerce sector is regulated has been significantly changed by recent changes in the foreign direct investment (FDI) policy of India. Despite the previous efforts of Press Notes 3 (2016) and 2 (2018) in controlling uncertified e-commerce players, it was disclosed that some foreign-funded platforms were violating these regulations by manipulating inventory, pricing, and favouring individual sellers by controlling inventory, price control, and preferential treatment of individual sellers despite operating as a marketplace.


In reaction, the Government in May 2025 instituted the Foreign-Owned and Controlled Entity (FOCE) structure, whereby any entity legally registered in India, but with a majority ownership or control of foreign investors, is now treated like a foreign entity under the FDI framework, irrespective of where it is domiciled.


Meanwhile, in November 2024, the Reserve Bank of India (RBI) made it mandatory that any foreign portfolio investment (FPI) that crosses the 10 per cent mark in a listed Indian company should be converted to FDI within five trading days. This will make it more open and seal the loop holes under which big foreign investments used to filter through sectoral restrictions.


Collectively, the existing regulatory framework is protecting homegrown businesses, banning roundabout inventory-based business models, and enforcing neutral, transparent activity by foreign-funded platforms, which basically closes previous loopholes and strengthens the compliance throughout the digital commerce environment.

 

Author: -Shreya Agarwal, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.


[1]  Department for Promotion of Industry and Internal Trade, FAQs on Foreign Direct Investment (FDI) Policy, 1 , https://dpiit.gov.in/sites/default/files/FAQs_FDIPolicy.pdf.

[2]  Department for Promotion of Industry and Internal Trade, FAQs on Foreign Direct Investment (FDI) Policy, 2, https://dpiit.gov.in/sites/default/files/FAQs_FDIPolicy.pdf.

[3]  How the Likes of Amazon Have Circumvented India’s FDI Laws, Moneycontrol (Apr. 6, 2021), https://www.moneycontrol.com/news/business/how-the-likes-of-amazon-have-circumvented-indias-fdi-laws-6126901.html.

[4]  Press Note 2 (2018), Para 5.2.15.2.3(i), Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India (Dec. 26, 2018), https://dpiit.gov.in/sites/default/files/pn2_2018.pdf.

[5]  Benn Kochuveedan, RBI, Sebi issue framework for reclassifying FPI investments as FDI, The New Indian Express (Nov. 11, 2024), https://www.newindianexpress.com/business/2024/Nov/11/rbi-sebi-issue-framework-for-reclassifying-fpi-investments-as-fdi-2.

[6]  Press Note 3 (2016), Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India (2016), https://dpiit.gov.in/sites/default/files/pn3_2016_0.pdf.

[7]   Press Note 2 (2018), Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India ( 2018), https://dpiit.gov.in/sites/default/files/pn2_2018.pdf.

[8]  Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Sched. I at 279–80 (India), https://thc.nic.in/Central%20Governmental%20Rules/Foreign%20Exchange%20Management%20(Non-debt%20Instruments)%20Rules,%202019.pdf & Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Sched. II at 291–93 (India), https://thc.nic.in/Central%20Governmental%20Rules/Foreign%20Exchange%20Management%20(Non-debt%20Instruments)%20Rules,%202019.pdf.

[9] India plans stricter rules for companies with foreign ownership, Reuters (May 19, 2025), https://reuters.com/

[10] India’s E-Commerce Foreign Direct Investment Rules, ITIF (May 14, 2025), https://itif.org/

[11] India's central bank issues operational framework for reclassification of FPI investments as FDI, Reuters (Nov. 11, 2024).

[12] Benn Kochuveedan, RBI, Sebi issue framework for reclassifying FPI investments as FDI, The New Indian Express (Nov. 11, 2024), https://www.newindianexpress.com/business/2024/Nov/11/rbi-sebi-issue-framework-for-reclassifying-fpi-investments-as-fdi-2.

[13] The Daily Pioneer, Are E-commerce Giants Violating FDI Norms?, The Daily Pioneer (Feb. 14, 2025), https://www.dailypioneer.com/2025/columnists/are-e-commerce-giants-violating-fdi-norms-.html.

[14] India Probe Finds Amazon, Walmart’s Flipkart Breached Antitrust Laws, Reuters (Sept. 12, 2024), https://www.reuters.com/world/india/india-probe-finds-amazon-walmarts-flipkart-breached-antitrust-laws-2024-09-12.

[15] Lexology, India: RBI and SEBI Issue Framework for Reclassification of FPI Investments as FDI, Lexology (Nov. 14, 2024), https://www.lexology.com/library/detail.aspx?g=cd2c8762-877c-4c2b-a134-7249ff5af601.

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