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India amends foreign investment rules governing foreign debt investment into Indian entities and foreign direct investment into e-commerce sector

Executive summary

The Reserve Bank of India (the RBI) issued new regulations, on 17 December 2018, governing foreign debt investments in the form of External Commercial Borrowings (ECB) into Indian entities. The new regulations relaxes conditions on eligible borrowers, eligible lenders and end-use restrictions.

In addition, the Department of Industrial Policy and Promotion (DIPP), Government of India, released a press note on 26 December 2018 amending rules for Foreign Direct Investment (FDI) in the e-commerce sector, which are effective 1 February 2019.

Detailed discussion

ECB regulations

The RBI introduced the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (the Regulations). The key changes contained in the Regulations are as follows:


Eligible borrowers

  • Indian Limited Liability Partnership are newly included in the entities permitted to raise ECB.
  • All entities eligible to receive foreign direct investments under the Indian FDI Policy would be eligible to raise ECB.

Eligible lenders

  • Lender should be a resident of Financial Action Task Force or international organization of securities commissions compliant country.

Hybrid instruments

  • Hybrid instruments, such as optionally convertible debentures, would be governed by separate hybrid instrument guidelines to be issued by the Indian Government.

The above amendments are subject to additional guidance from the RBI on detailed rules, conditions, implementation guidance and operational matters which is expected shortly.

FDI regulations in e-commerce sector

The DIPP released a press note containing the following additional conditions for FDI to the e-commerce sector:


Restriction on the e-commerce marketplace entity

  • The e-commerce marketplace entity or its group companies with equity participation or control on inventory of an e-commerce marketplace would not be permitted to sell their products on the platforms run by the e-commerce marketplace entity.
  • Sellers on the e-commerce marketplace should not be mandated by the e-commerce marketplace entity to sell their products exclusively on its platform.

Control over inventory

  • The e-commerce marketplace entity should not exercise control over the inventory, i.e., goods purported to be sold, since ownership or control over the inventory will result in the business being regarded as an “inventory based model,” to which FDI is not permitted.
  • If more than 25% of the purchases of a vendor are from the marketplace entity or its group companies, no FDI is allowed to the e-commerce entity as it will be deemed to have control over the inventory of the vendor.

Services by the e-commerce marketplace entity

  • Services to be provided to vendors by an e-commerce marketplace entity or other entities in which the e-commerce marketplace entity has direct or indirect equity participation or common control should be at arm’s length and in a fair and non-discriminatory manner to avoid potential assessment of noncompliance penalties.
  • Cash back provided by group entities of the e-commerce marketplace entity to buyers must be fair and non-discriminatory to avoid potential assessment of noncompliance penalties.
  • Provisions of services to any vendor on terms which are not made available to other vendors in similar circumstances would be deemed to be unfair and discriminatory to avoid potential assessment of noncompliance penalties.

Specific reporting requirement

  • An e-commerce marketplace entity will be required to furnish a certificate with a report of a statutory auditor to the RBI by 30 September every financial year confirming compliance of the FDI guidelines.

EYG no. 012836-18Gbl

Download this Tax Alert as a PDF file.


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