New FDI Rules Allow E-commerce Firms to Hold Inventory for Export; Domestic Sales Excluded

The Department of Economic Affairs under the finance ministry has changed the Foreign Direct Investment (FDI) rules for e-commerce companies, as per a Business Standard news report.  

The change allows these firms to hold inventory where the goods are meant only for export. The goods must be manufactured or produced in India.  

The department notified the change on September 2 by adding a provision to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. 

Export Conditions 

Under the new provision, an e-commerce entity can use an inventory-based model only for exporting goods or products made or produced in India. The exports will have to follow the Foreign Trade Policy 2023, the Handbook of Procedures (HBP) and the Foreign Exchange Management (Export of Goods & Services) Regulations, 2015. 

The notification states that the restrictions on Business to Consumer (B2C) transactions and inventory-based e-commerce will not apply to goods or products exported through e-commerce. 

Domestic Inventory Model Unchanged 

The amendment is limited to exports and does not permit inventory-based e-commerce retailing for domestic sales. FDI in inventory-based e-commerce retailing has not been allowed for domestic B2C sales. 

The July decision had provided for the change, and the September 2 notification has now brought the provision into force. 

Transaction-Level Checks 

Amit Agarwal, Senior Partner at Nangia & Co LLP, said an FDI-invested e-commerce entity can hold and sell its own inventory of Indian-origin goods if the goods are ultimately exported rather than sold for domestic consumption. 

He said companies using the exemption would need to establish for each transaction that the goods are of Indian origin and were exported under the foreign trade policy. 

Export Proceeds and FEMA 

Export proceeds will also have to be realised and reported as required under FEMA's Export Regulations. Companies will therefore have to maintain records covering the origin of goods and the export transaction. 

Agarwal said any leakages or slippages could result in the FEMA implications that apply to the existing restrictions on inventory-based models. 

Read More: Tamil Nadu CM Vijay Announces ₹4,800 Crore Drinking Water Projects, Other Measures! 

Conclusion 

The amended rules allow inventory-based e-commerce activity for exports while keeping the restriction on domestic B2C inventory sales in place. The arrangement remains subject to export and FEMA requirements. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.   
 
Investments in the securities market are subject to market risks, read all the related documents carefully before investing.