Online sales by manufacturing companies with 100% FDI

Introduction

Wholly owned subsidiaries of foreign companies which are engaged in manufacturing have been permitted to sell their products on e-commerce platforms in the FDI Policy. But the question here is whether these manufacturing companies with 100% FDI are allowed to sell their products online directly to the end customers as per the FDI Policy. Till now it is nowhere clearly worded that manufacturing companies with 100% FDI are allowed to retail online. This is the reason that manufacturing companies seek prior approvals or send intimation letters to the government prior to commencing their online retail operations, as an abundantly precautionary measure of avoiding any future exposure/liability.

In this write-up, the author has discussed and analysed the relevant provisions of the extant FDI Policy to ascertain if there is any restriction on the manufacturers for selling their products online directly to the consumers.

Foreign Direct Investment (FDI) Policy

FDI in India is regulated by the Foreign Exchange Management Act, 1999 (“FEMA”). The Department for Promotion of Industry and Internal Trade [“DPIIT”] (earlier known as the Department of Industrial Policy and Promotion (“DIPP”)), Ministry of Commerce and Industry has issued FDI Policy of India in various sectors such as manufacturing, e-commerce, trading, etc. The consolidated FDI Policy 2020 dated October 15, 2020 shall be taken into consideration to understand the online selling business model adopted by the manufacturing companies having 100% FDI.

Meaning of “Manufacture”

It is pertinent to first identify whether a company even falls under the umbrella of the term ‘manufacture’. Para 2.1.35 of the FDI Policy of the FDI Policy defines the term “Manufacture” as “Manufacture, with its grammatical variations, means a change in a non-living physical object or article or thing- (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.”

On a perusal of this term, it is quite clear that transformation of something which is raw into a new or distinct end product or article or thing will be considered as manufacture. Now, if a company’s product is the result of transformation of a raw material, it will be known as the product of a manufacturing company and thus, will be governed by the provisions of FDI Policy for manufacturing companies.

However, companies do not always manufacture the products on their own. Many times, companies enter into contracts with other manufacturers to undertake manufacturing for them. Reason being it is economical and efficient for the companies and they can shift their focus on marketing and other incidental activities. 

In general parlance, two terms are used in the manufacturing sector, these are “self-manufacturing” and “contract manufacturing”.

“Self-manufacturing, as the name itself suggests, means manufacture of goods undertaken by the company wherein the company undertakes the entire process of transformation of raw material into the end product without any aid from a third party. 

“Contract manufacturing”, on the other hand, in common parlance refers to the outsourcing of manufacturing/ or production of goods by the source company under its own brand name to a third party in return for a mutually decided fee or remuneration. Production outsourced could be a component of an entire product being manufactured by the source company, or the complete product itself.”

FDI in manufacturing

Para 5.2.5 of the Consolidated FDI Policy provides the provisions which govern FDI in the manufacturing sector. It states that foreign investment in the ‘manufacturing’ sector is under automatic route. Manufacturing activities may be either self manufacturing by the investee entity or contract manufacturing in India through a legally tenable contract, whether on Principal to Principal or Principal to Agent basis. Further, a manufacturer is permitted to sell its products manufactured in India through wholesale and/ or retail, including through e-commerce, without Government approval.

Notwithstanding the FDI policy provisions on the trading sector, 100% FDI under Government approval route is allowed for retail trading, including through e-commerce, in respect of food products manufactured and/or produced in India.

Thus, we come to a conclusion regarding the following aspects:

(i) That the foreign investment in manufacturing sector is under the automatic route (i.e., where no prior Government approval is required);

(ii) Manufacturing activities may be either conducted by self-manufacturing or contract manufacturing in India;

(iii) Contract manufacturing activities shall be outsourced only by way of execution of a legally tenable contract whether on Principal to Principal or Principal to Agent basis;

(iv) Manufacturer is permitted to sell its products manufactured in India through wholesale and/ or retail, including through e-commerce, without Government approval.

Similar provisions are also provided in the Schedule I of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) which state that 100% FDI is allowed in the manufacturing sector and the manufacturer is permitted to sell its/ his product through e-commerce also. In this regard, Serial Number 5 of Table under Schedule I of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 has been reproduced below for clarity:

SCHEDULE I

Purchase or sale of equity instruments of an Indian company by a person resident outside India 

TABLE

S No	Sector/ Activity	Sectoral Cap	Entry Route
….
5.	Manufacturing	100%	Automatic
5.1	A manufacturer is permitted to sell its products manufactured in India through wholesale and/ or retail, including through e-commerce without Government approval. Notwithstanding the provisions of these Rules on trading sector, 100 percent foreign investment under the government approval route is allowed for trading, including through e-commerce, in respect of food products manufactured and/ or produced in India. Applications for foreign investment in food products retail trading shall be processed in the Department of Industrial Policy and Promotion before being considered by the Government.

Both the NDI Rules and FDI Policy are in harmony with regard to the provisions that 100% FDI is allowed under automatic route in the manufacturing sector and such products manufactured by them are allowed to be sold through wholesale and/ or retail, including through e-commerce without any Government approval. At the same time there is no clarification by the government as to whether the goods which are imported into India by a manufacturing company from its Foreign holding company for further selling are allowed to be sold online or not.

Will Online sale be considered as “e-commerce”

The provisions related to e-commerce have been provided in the para 5.2.15.2 of the FDI Policy and Serial Number 15.2 of Table of Schedule I of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. 

1. i) E-commerce has been defined as buying and selling of goods and services including digital products over digital & electronic networks. 
2. ii) E-commerce entity means a company incorporated under the Companies Act 1956 or the Companies Act 2013 or a foreign company covered under section 2 (42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2 (v) (iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business. 

The e-commerce model as enunciated above is applicable for market place aggregators / facilitators (such as Amazon, Flipkart, E-bay, etc) who provide digital platforms to the sellers of goods to directly sell them to consumers.

Under the extant FDI Policy, an e-commerce company having FDI can only engage in Business to Business (B2B) e-commerce (as a marketplace) and it cannot engage itself in retail trading. To the contrary, manufacturing companies sell products manufactured by them either on their own or through contract manufacturers in the Indian domestic market, through offline mode/ channel. 

Therefore, manufacturing entities cannot be considered to be an e-commerce entity, even if it sells goods (manufactured by it or through contract manufacturers) in the Indian market through online mode. To reiterate, manufacturing companies under the current FDI Policy are clearly permitted to sell their products online in India, apart from the offline brick and mortar model. 

Hence, undoubtedly, the FDI provisions governing an e-commerce entity are not applicable to the manufacturing companies. 

Will Online sale be considered as “Single Brand Retail Trade”

Firstly, it is important to note that there is no precise definition of ‘single-brand retail’ in any official Circular or Notification of government or any governmental authority. In general single-brand retail refers to the selling of goods under a single brand name. An article on FDI in Single Brand Retail Trading may be viewed here to know more about it.

Further, the term ‘trading’ has to be taken into consideration. The same has been defined in Black’s Law Dictionary, eighth edition as “the business of buying and selling, esp. of commodities and securities”. Further, in common parlance, a retail trading entity is engaged in purchase of stock in ‘ready to sell’ condition and sell it to the end-use customers without any additional processing.

The FDI Policy covers provisions related to Single Brand Product Retail Trading [“SBRT”] and allows 100% FDI (earlier it was 49%) in case of SBRT through automatic route but subject to the conditions as mentioned in the FDI Policy. 

A manufacturing company manufactures products either in its own facilities after employing labour and machinery to convert raw material into finished goods or through contract manufacturers in India. Hence, it is evident that the FDI provisions governing a retail trading entity shall not apply to the manufacturing companies. 

Conclusion

The restrictions imposed on the ‘retail trading’ and ‘e-commerce’ entities are not applicable on the manufacturing companies having FDI who are intending to sell their products online directly to the consumers. Further, no Government approval is required for undertaking the sales of product over electronic platform by the manufacturing companies under the extant FDI Policy. 

Moreover, in a press release dated 28th August, 2019, government made it clear that manufacturing through contract contributes equally to the objective of Make in India. FDI now being permitted under automatic route in contract manufacturing will be a big boost to the Manufacturing sector in India. The amendments to the FDI Policy are meant to liberalize and simplify the FDI policy to provide ease of doing business in the country, leading to larger FDI inflows and thereby contributing to growth of investment, income and employment. It rightly emphasized on the fact that FDI is a major driver of economic growth and a source of non-debt finance for the economic development of the country.

Hence, even without any regulatory clarification in this regard it can be safely concluded that FDI Policy nowhere restricts foreign entities from setting up their manufacturing units in India and directly selling the products by means of their own electronic platforms.