Category: Corporate

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Corporate Litigation Skills

Declaring Independence Part 2: Sourcing Work for your Independent Practice

sourcing work

Declaring Independence  is a series by Tishampati Sen, an Advocate-on-Record who quit his job at a top-tier law firm to start his own practice. Setting up one’s own practice at a relatively young age is a challenge, albeit one that can have great rewards. Every month, Tishampati will look at an important aspect of going independent and have useful tips and advice for young lawyers who just want to break free! Read the previous post here.

I knew at the time of taking my first steps towards independent practice, that one of the formidable challenges in front of me would be of generating enough work to make a living. One of my greatest apprehensions at the time of making the move was that I might have to sit idle for many months before people would actually entrust with work. From the very beginning, therefore, I associated with and assisted eminent senior counsel and other advocates in their work so as to be ‘in – practice’ even while my independent work gathered momentum

But from very early on, in fact even before I had completely quit the firm that I was a part of, I had started pitching for work and trying to impress upon people the fact that a new hotshot lawyer was soon going to be available to take care of all their legal needs.

DRAWING A BOUNDARY

One of the key questions that people would ask me is “so what kind of work do you do?” and my immediate response would be “Everything”. But invariably the person would continue to look at me expectantly waiting for me to say something more, before finally nodding and uttering a dismissive “good”. But I didn’t know a better answer at the time. I was actually preparing myself to do all sorts of legal work. I had both transactional as well as dispute resolutions experience and intended to do both kinds of work in the future as well. Over a period of time, immediately after my “Everything”, I decided to add, “I do both litigation as well as transactional work” to fill the awkward silence. But to my surprise I was still met with a glazed look.

One of my more experienced colleagues heard my response one day and decided to rescue me. He let me in on a little secret. “Branding is important. People don’t like to believe that ‘everything’ is possible. Give them a boundary and a framework. When you give them your limitations, your capabilities also become believable; and if you haven’t discovered your limitations yet, invent them.”

This is one of the most important and beautiful lessons in human psychology for me. I am not sure if I completely believed it at the time, but the next time some one asked about the kind of work I do, my answer was a little more tempered. I still told them that I do everything but I also added an ‘except…’ and told them one or two things that I don’t do; or what I haven’t done yet – but was willing to do if the opportunity presented itself. Surprisingly, there were many more people now nodding and moving forward with the conversation. In fact, there were even some who would discount my ‘limitation’ and say “Yes, but after all it’s only another branch of law. If you study it, I’m sure you’ll pick it up.” 

FACTORS GOVERNING THE CHOICE OF WORK

There could be a few factors that could govern the kind of matters/work that one may want to source and take up at this stage:

1. Streams: There are some who, like me, enjoy both streams of practice and therefore may actively look to do all sorts of work in both transactional–advisory practice, as well as in litigation. In fact from my experience, the learnings in one could even help your develop your skills in the other. For example, the litigation experience and the understanding of the courts and the processes involved has helped me develop a different perspective on the language used in contracts. I now have an understanding that clauses that may seem air–tight in language may be looked at in a completely different context in court. As such, the advice on the transactional side is now more pragmatic than theoretical. Similarly the experience on the transactional side helps in grasping complex transactions better and may, therefore, allow one to articulate the issues involved much better in court.

However, there are also those who would much rather focus on any one stream (and within that, a sub-stream) to be able to build a brand and expertise in the subject. One cannot deny that in this field where a client’s interest and sometimes life is at stake, how the world perceives you may become relevant. Some time back when a friend needed legal representation for a family member who had unfortunately been tangled up in criminal proceedings, he was very clear that he wanted a ‘pure’ criminal lawyer. Not someone who also practiced criminal law. Similarly in sensitive matters such as divorce etc., parties may be more comfortable with an advocate who shows herself to have expertise in that field.

2. Forum of Practice: This is more relevant for the litigation side of the practice, as often advocates may also target work keeping the forum in mind. There are those who may have a wider network outside the city/state, as such it may make sense to consider appellate forums. The choice of the forum could also be impacted by various other considerations such as the kind of work that one enjoys (trial matters, versus consumer matters, tax etc.), the clientele typically associated with a particular forum, the regularity of proceedings in the forum, or simply what interests you more etc. Here again there could be the debate for specialisation versus exploration. I know of many young advocates who have focused on the practice in a few particular forums. Over a period of time they have developed a better understanding of the processes and the requirements in the registry and are able to better fathom the tendency and mood of the bench. These advocated then become much more in demand in these particular fora. However, on the flip side one may want to practice in various fora and over a much longer period have a much wider presence. In fact some might argue that having matters in various fora and the thrill of appearing before different judges with different opposing counsel is what makes the litigation practice exciting.

3. Realistic Evaluation of Reference of Work: Another perspective to keep in mind, while considering the kind of work that one may want to attract, is what would make sense in terms of being able to develop clientele. For example, as a young advocate it may make sense to spend as much time observing and assisting on trial matters, consumer matters, divorces etc., since the potential to have this nature of matters being referred to you by individual clients is much higher when on your own.

Even on the transaction front, it may make sense to initially focus on the kind of work that could lead to repeat requests and referrals by clients. For example focus could be on the issues facing start–ups that have great need for legal advice but may not have the budget to approach the established and eminent legal practitioners. Focusing on the individuals or smaller business units in the beginning may be a prudent starting point. 

CURB YOUR ENTHUSIASM

A common and popular advice seems to be that a junior advocate must be willing to take whatever work comes his way. Saying no to any work, no matter how tedious or boring it might seem, is almost sacrilegious. It makes sense of course – you must be willing to take the good with the bad, and only when you have had a varied and diverse experience can you even begin to identify your own unique strengths and weaknesses and likes and dislikes. In fact, a bit of a push and pressure may even help develop character and create the mettle to take up challenges. So the general idea is that one should never say no to work, and once accepted one must figure out the capacity and the wherewithal to handle the same.

However, there was one person who gave me contrary advice, which also made a lot of sense. This gentleman who has a thriving criminal practice, told me, over a cup of coffee, “it is equally important to curb your enthusiasm.” His point was that at the beginning of one’s independent practice, a junior advocate/lawyer must focus on work as much as self–development. “Eventually you have to start keeping in mind the balance–sheet, and focus on managing your office. Things like the supply of coffee for clients, printer cartridges, wages, etc., also start taking up your time. So value this time in the beginning. Now is the time to develop the lawyer within. Keep the businessman waiting for a while. Appreciate that since for now there is less work, you should read the law for the sake of reading the law. Sooner or later work will find you.”

He also warned me that taking up more than can be handled in the beginning could be more detrimental than not having enough work. If you tell a client frankly that you may not be able to handle his work, you may lose her/him temporarily. But servicing a client badly could lead to the loss of not just that client but many future clients as well. He called it “poisoning the line”, which had a nice dramatic ring to it and so it has stuck with me.

To close off this piece, I would like to remind you of what I had said in the beginning of this series: I am not qualified to give you advice as to your specific way forward. My only aim is to share my experiences and the views that others have selflessly and candidly shared with me. So, choose the viewpoint that suits you and your temperament best. See you next time!

Tishampati Sen

Tishampati Sen is an Advocate–on–Record  of the Supreme Court of India. He worked with one of the premier law firms of the country (in corporate transactions as well as dispute resolution) for many years before deciding to take the plunge of independent practice. He appears primarily before the Hon’ble Supreme Court of India, Delhi High Court and the National Consumer Disputes Redressal Commission.

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Corporate Litigation Skills

Declaring Independence: What to keep in mind when starting an independent practice

Declaring Independence  is a series by Tishampati Sen, an Advocate-on-Record who quit his job at a top-tier law firm to start his own practice. Setting up one’s own practice at a relatively young age is a challenge, albeit one that can have great rewards. Every month, Tishampati will look at an important aspect of going independent and have useful tips and advice for young lawyers who just want to break free!

Ever since I graduated from law school, I have enjoyed a wide variety of experiences. I have had the good fortune of starting my career with a large top-tier law firm in Delhi-NCR, where I trained with some of the finest lawyers and learnt how to be a legal professional. I gained experience in the transaction side of the practice, as well as in the dispute resolution side. I handled large deals and conducted negotiations and also learnt to prepare matters, draft pleadings and appear in various forums. However along the way I developed a strong desire and passion to be able to start something on my own. So finally, egged on by my family, much to the horror of some close friends and colleagues, I took the decision to quit the firm and work towards setting up my own practice.

Before we move on, let me say this right up front, this project is in no way an attempt to show-case life outside a law firm, or conversely the life within firm or to discuss which is better. I am only using this platform to share some of my experiences and lessons that I have learned in the process of setting up an independent practice.

Moving out of my Comfort Zone

One of the first things that I learnt when I told people that I am looking to quit the firm to start my own practice, was how woefully inadequate my life is! I had been looking at the world through rose tinted glasses. One very prominent senior colleague in the firm smiled at me and told me that I was having the “law firm mid–life crisis”. There were others who told me about the people who had tried their hand at starting their own practice, failed miserably and then could not even find a job at a law firm again. The fact is that we know of all the reasons why such a move could end up being detrimental.

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But I noticed that once I did take the step, let go of the safety net and swam into the rougher waters, there were plenty of people to hold my hand and show me the way. The funny thing is that most people will tell you only about what could go wrong, and I guess to a large extent that is needed so that you make an informed, practical decision. But happily, there are quite a few very successful advocates and legal practitioners out there, who have equally, and sometimes more remarkably left cushy jobs to follow their dream of having their own practice. These are people who understood the internal conflict and self–doubt that I was going through and gave me invaluable guidance and a pat on the back. Their only request was that I persevere even when I cannot see the light at the end of the tunnel. I still remember how a rather soft–spoken, quiet sort of a man, had looked squarely into my eyes and had said with a force I have never before noticed in him, “If you have a safety net, burn it. Only when there is a fire on your backside will you make this work”.

FIRST STEPS WHEN LEAVING THE FIRM

So if you are in a law firm and have decided to branch out on your own, the first few steps could possibly include the following:

1. Save, Save and Save

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Definitely give yourself a few months (if not a year or more) before you disclose that you plan to move out. Use the steady flow of income that is coming your way to create some savings. One of the great things that my wife helped me do was analyse our spending and expenses for a couple of months (of course being told that I don’t really need a new PS3 game, was like being relegated back to school), and we came up with a number which would be the average monthly expense. Keeping a plan/sum in mind may allow you to save while still not living like a hermit. Savings are definitely a must, since it gives a bit of a reassurance as to one’s financial sustainability in the initial period. Panic is a very usual and daily emotion in such a state, but it helps if your partner or family member or friend can keep reminding you of the savings and assure you that you will be alive and fed, even if you make nothing, or close to nothing, initially.

2. Choosing the kind of work while in the firm

This, to a large extent, depends on the structure followed in the firm and whether there is any option for you to be able to choose the kind of work that you would be involved in. In the firm that I was a part of, while work was mostly assigned, one did have some amount of say and control over the kind of matters that one could opt into. The firm attracted clients who were large corporate houses, or businessmen, and the work, that I was initially involved in, was mostly in the nature of writ petitions, or Special Leave Petitions, and some company matters. But I realised that it would be a while before corporate houses would approach me and pay me to go challenge the constitutional vires of certain laws. Therefore, based on the advice of friends and mentors, I tried to involve myself in a wide variety of litigations including matters in the lower tribunals, civil suits, certain minor criminal proceedings etc., so as to get a wide base of exposure. Most people in a firm would agree that the attraction of any particular matter or transaction is also often contingent upon the billing rate and the regularity of payment by the client. However, at this stage of declaring independence, the attraction is for the specific forums where the matter is listed and the nature of the dispute. A word of caution, though: while doing this in the firm your revenue and billing may take a hit. Swallow the embarrassment of the scrutiny that your performance may be subjected to, and remind yourself of the larger picture. A good friend once gave me the following perspective which was helpful: “Take it like being taught important skills and being given essential experience, and all the while being paid for it.”

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Since my practice and work today includes both transactional as well as disputes work, I must share my learning on the transaction front as well. My experience in the firm on the transaction front was with the Projects team, under a truly brilliant partner and with an excellent team. Hence, I have always been very comfortable and confident in contract law, structuring deals and providing legal opinions on various rules and regulations. However, given the work split and team divisions in the firm, I did not have ample exposure to pure company issues relating to the shareholders rights, structuring and restructuring of companies. There seems to be plenty of work relating to the such company issues that are available for young independent lawyers to do. Especially, in the age of start-ups, corporate arrangements, shareholder agreements and restructuring become viable work opportunities. So while I had to pick up these skills along the way, with the help of friends, if you intend to do transactional work, get some experience on these while still with the firm if you can. It may not be as juicy as contractual, or other work, but get into it. You’ll thank me later!

3. Preparing the mind

Ask anyone else who has taken the same path before and they will tell you right out, your life will change once you have left the safe harbours of the firm. Of course there are many types of firms and how you feel will depend on the structure of the firm as well as how long you have spent there. But I never realised until I quit my job, how large a part of my identity was the firm name. Having had the good fortune of being a part of a top–tier law firm with a very recognisable and well–established name, I had always been very confident and proud of introducing myself to people and piggy backing on the firm’s goodwill. I guess it is presumed that since you are with this particular firm, you would be competent as an advocate and a contender. Corporates and business people recognise your firm name and you bask in its reflected glory. But once that identity goes, you are relegated to only being a lawyer. One of many. No matter how many times you tell people that you have your own practice or your own firm, unless you are (a) middle–aged, and (b) a known name (which is unlikely until you are middle–aged), it is often heard by people as “not employed”. One moment you are the hot-shot associate in one of the largest firms in the country and the next, you are just an advocate like the thousands around you. What’s more, the other advocates are more street smart than you and have something you don’t have yet – clients. Prepare yourself to re-invent your identity and image. You will have to build your reputation and goodwill from scratch.

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Simple perks like clean toilets, green tea, a court clerk who actually knows how to get things done, playing a cricket tournament as a part of the firm, running printers, office boys etc., may be sorely missed and the memory of the same could trigger a violent emotional outburst later. For all those who are overworked and stressed from working really hard in a law firm looking at going independent as a way out, to whom it looks like a way out from the crazy hours, working weekends, unreasonable clients etc., you are in for a shock! You will find yourself working just as hard (hopefully and eventually) when your work load increases. There are no longer any concept of weekends, all days merge into each other. Remember, shorter timelines for delivery and lower fees are the only USP that you have to offer in the period while the world figures out that you’re a legal genius and are willing to pay you top dollar.

KEEP THE FAITH

The one major learning I have had since I quit the firm has been that things have the propensity to work themselves out if one is willing to be patient and open to receiving help. Fortunately, as I mentioned earlier, there are plenty of very wonderful advocates and lawyers, who are very supportive towards ‘youngsters’ and happily act as mentors towards young advocates and lawyers. In the period since I quit the firm, the one thing that I am very proud of myself for is that I was able to swallow my pride, quickly get over my past identity and seek guidance from people who had been doing this before, including people who are younger than me. I have picked up invaluable lessons and tips on various issues, such as client handling, self–projection, preparing for a matter keeping in mind the concerned judges and the day on which the matter may be listed, settling upon the fee rates, and the way to remind clients and seek payment of the same. 

I look forward to sharing my experiences and learnings with you on this blog!

Tishampati SenTishampati Sen is an Advocate–on–Record  of the Supreme Court of India. He worked with one of the premier law firms of the country (in corporate transactions as well as dispute resolution) for many years before deciding to take the plunge of independent practice. He appears primarily before the Hon’ble Supreme Court of India, Delhi High Court and the National Consumer Disputes Redressal Commission.

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Corporate Specialised

How do e-Wallets like Paytm work?

In the dawn of demonetisation, most of us have found ourselves adapting to new payment mechanisms and methods. The government’s strong push towards a cashless society seems to be ushering in the age of the e-wallet. Paytm alone is responsible for more transactions per day than the combined average daily usage of all the debit and credit cards in India. Mobile wallets, which many of you are using these days, are a type of pre-paid instrument. But what are pre-paid instruments? How do they work?

Here are some frequently asked questions, which should provide some clarity on the conceptual and regulatory framework behind pre-paid instruments in India.

I am hearing this term for the first time. What is a pre-paid instrument?

Pre-paid instruments are payment instruments that facilitate purchase of goods and services, including by way of funds transfer, against the value stored on such instruments. The value stored on these instruments represents the value paid for by the holders of such instruments.

The issuers of pre-paid instruments have tie-ups with various merchants, and you can use the value stored on your instruments to carry out transactions with these merchants.

Ok. That’s a very legalese definition. Did the Reserve Bank of India come up with it? What is the regulatory framework for pre-paid instruments?

Actually, yes! The Reserve Bank of India (RBI) first provided the guidelines on pre-paid instruments (let’s just call them PPIs) in 2009. Over the years the RBI, issued several notifications (yes, they were not as dynamic as today!) in relation to PPIs. It then decided to consolidate all these notifications in a Master Circular (which gets updated on a yearly basis). Pre-paid instruments are subject to the Payment and Settlement Systems Act, 2007.

The latest Master Circular – Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India was notified on 01 July 2016. You can have a look at that here. You will find all the definitions and other details in this Master Circular.

Cool! So I guess then a PPI is a regulated instrument and one needs to have the approval of the RBI to issue one?

Yes. The RBI provides licenses to issue PPIs. All persons proposing to operate payment systems and involved in the issuance of PPIs have to seek authorisation from the Department of Payment and Settlement Systems, RBI, under the Payment and Settlement Systems Act, 2007.

Ok. If mobile wallets are one type of PPIs, what are the other types?

PPIs can be issued as smart cards, magnetic strip cards, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument, which can be used to access the pre-paid amount. A mobile wallet (Paytm, Mobikwik etc.) is one type of PPI. However, this is a dynamic sector and entrepreneurs are devising new prepaid mechanisms everyday.

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Mobile Wallets like Paytm and Mobikwik are Pre-Paid Instruments

Broadly the RBI classifies PPIs into the following types: Closed, Semi-Closed and Open Payment Instruments.

What are Closed System Payment Instruments?

These are payment instruments issued by a person for facilitating the purchase of goods and services from him/it. These do not permit cash withdrawal or redemption. As these instruments do not facilitate payments and settlement for third party services, issue and operation of such instruments are not classified as payment systems. (A pre-paid card in your canteen or a food court can be considered a type of closed system payment instrument.)

What are Semi-Closed System Payment Instruments?

These are payment instruments, which can be used for purchase of goods and services, including financial services at a group of clearly identified merchant locations/establishments, which have a specific contract with the issuer to accept the payment instruments. These instruments also do not permit cash withdrawal or redemption by the holder.

Mobile wallets like Paytm and Mobikwik are semi-closed payment instruments.

What are Open System Payment Instruments?

These are payment instruments, which can be used for purchase of goods and services, including financial services like funds transfer at any card accepting merchant locations (point of sale terminals) and also permit cash withdrawal at ATMs.

Debit cards are open system payment instruments.

Are there any limits in relation to the value that I can store in the PPIs?

Currently, the limit is Rs. 20,000 per month for PPIs where minimum details of the customers have been collected.

This limit can be extended up to Rs 1,00,000 per month after collecting the appropriate KYC (Know Your Customer) documents from the holders.

Ok. So what can I do with my pre-paid instruments?

Let’s only consider semi-closed PPIs from now on, as these are the most commonly used. Your scope of usage of a semi-closed PPI is dependent upon the number of merchants the PPI issuer has tied up with. Generally you can use your PPI for payment of utilities with these merchants and for transferring money to other PPIs.

e.g. Paytm has a tie up with Uber and not with Ola. So you can use your Paytm wallet to make a payment for Uber but not for Ola.

Ok. So what happens to the money after I transfer it to my PPI?

Every PPI issuer (like Paytm, Mobikwik etc.) is required to create an escrow account with a bank, where all the money collected from its customers are credited. This account is a non-interest bearing account. The PPI issuer is required to create a security on this account in favour of the PPI holders (customers like you and me). Therefore the holders are secured and in the event of liquidation/bankruptcy of the PPI issuer, the merchants/PPI holders shall be given preference to the other creditors of the PPI issuer.

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There are strict norms, which regulate any debit or credit of this escrow account. However at no point of time can the amount in the escrow account be less than the aggregate of the balance amount in all the corresponding PPIs and all pending payment instructions in favour of the merchants. So don’t worry, your money is safe with a PPI issuer!

Can I redeem the money stored in my PPI?

No. You are not allowed to redeem your money from a semi-closed PPI. However if that particular PPI is being closed or if the RBI decides to stop this entire product of PPIs (highly unlikely, the RBI usually does not reverse a decision), the customers shall be allowed to redeem the amounts stored in the PPI, within the expiry date of the PPI.

Who can issue PPIs? Are all PPI issuers NBFCs or banks?

Only banks can issue Open PPIs. Non Banking Financial Companies (NBFCs) and other persons can issue Closed and Semi-closed PPIs. These persons need to have a minimum paid-up capital of Rs. 500 lakh and minimum positive net-worth of Rs. 100 lakh at all times. Only companies incorporated in India are eligible.

As mentioned earlier, the authorisation of the RBI is required.

If I keep my money in my bank account it earns me interest. Can I earn interest on the amount stored in my pre-paid instrument?

The money in the wallet or PPI can only be used for transactions against the value stored in such instruments.

You will not earn interest on the amount stored in the wallet.

I heard of an offer where I can get cashback points if I use a mobile wallet. How does this work?

These are usually marketing offers. The merchant may be offering the product at a discount to increase sales. The discounted amount is then credited back into the PPI.

At times, the PPI issuer may also credit the PPI with an additional amount to incentivise customers. A PPI can be funded/reloaded by third parties, so the PPI issuer is transferring the cashback amount to your PPI.

Hope this is of help! Do take some time to go through the RBI Master Circular for more details.

Abhishek is a legal and business strategy consultant with ePaylater, one of India’s first one- click checkout payment solutions. This article should not be construed as legal advice. The views expressed in this article are his personal views and opinions. He can be reached at abhishek.ray@epaylater.in.

Categories
Corporate

[Video] Share transfer restrictions – Learn the practical stuff, understand the legal debates

A corporate lawyer’s job includes facilitating mergers and investments by and into businesses. Really experienced corporate lawyers become extremely familiar with shareholders’ agreements and joint-venture agreements but young corporate lawyers and law students working at corporate law firm internships are known to look at terms like ROFR, ROFO, tag-along, and drag-along with wonder.

These different types of share transfer restrictions are a massive and complicated topic. To make it easier to understand, we spoke to Arjun Rajgopal (Principal Associate, Khaitan & Co.) and Umakanth V., an Associate Professor at National University Singapore, and among the most respected names in Indian corporate law.

What we have below are two videos which contain a completely lucid, simplified, and practical explanation of shareholder restrictions. In the first part, we discuss their purpose, their different types, and how they work.

In the second part, we look at how Indian laws have treated share transfer restrictions and the massive debate over their enforceability. What did the Companies Act, 1956 say about them and how have things changed with the new Companies Act, 2013?

If you want to be a corporate lawyer, you cannot afford to miss these two videos.

 

Categories
Corporate Specialised

FDI in e-commerce: Everything you need to know

DivyaSinha_SwethaPrashant_JSagarAssociatesThe Department of Industrial Policy and Promotion (“DIPP”) recently released Press Note No. 3 (2016 Series) dated March 29, 2016 (“PN3”), setting out guidelines for foreign direct investment (“FDI”) in the e-commerce space. We will look at the evolution of the law and policy on foreign investment in the e-commerce space, and in particular the scope and implications of PN3.

India’s FDI law

Foreign investment in India is governed by the Consolidated FDI Policy (“FDI Policy”) and the Foreign Exchange and Management Act, 1999 (“FEMA”) and related rules and regulations. The DIPP, which is the foreign investment regulatory arm of the Ministry of Commerce and Industry of the Government of India, makes amendments the FDI Policy by issuing press notes. Rules under the FEMA, however, are notified by the Reserve Bank of India (“RBI”).

FDI in e-commerce – the story before PN3

FDI has been permitted in the e-commerce space in a limited manner since the year 2000. According to Press Note No. 2 (2000 series) (“PN2”), FDI of up to 100 per cent was allowed in an e-commerce company under the automatic route (that is, without the approval of the government) as along as that company was engaged in business-to-business (“B2B”) e-commerce. If such a company was listed overseas however, 26 per cent stake in it had to be divested in favour of the Indian public within a period of five years. On the other hand, FDI was not permitted in retail trading, that is, in business-to-consumer (“B2C”) e-commerce. The policy had also categorically specified that the restrictions applicable (at that time) to domestic trading would be applicable to e-commerce as well.

On trading (including wholesale, single-brand retail, and multi-brand retail), the FDI Policy witnessed many changes since 2000, but in the e-commerce space it remained mostly stagnant until the end of 2015. Among minor changes made during this period, the requirement of mandatory disinvestment of 26 per cent stake in favour of the Indian public was dispensed with in 2006. “E-commerce” was also defined in the FDI Policy in 2010 to mean the activity of buying and selling by a company through an e-commerce platform.

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In 2014, the DIPP released a discussion paper seeking comments from various stakeholders for formulating the guidelines on FDI in the e-commerce sector. While it was still in the process of formulating the policy on FDI in B2B e-commerce, it released Press Note No. 12 (2015 series) (“PN12”), which liberalised the FDI Policy in the B2C e-commerce sector in a limited manner.

Shackles on single-brand B2C e-commerce

According to PN12, FDI in B2C e-commerce was permitted in ‘single-brand product retail trading’ as follows:

(a) single-brand retailers with physical stores were permitted to sell their products online as well; and

(b) Indian manufacturers were permitted to sell their own single-brand products online as along as the manufacturers are: (i) the investee companies (that is, those which have received FDI); and (ii) the owners of ‘Indian brands’ (that is, those that are owned by Indian residents or Indian companies owned and controlled by Indian residents); (iii) manufactured 70 per cent of the value of the products in-house; and (iv) sourced the remaining 30 per cent from other Indian manufacturers.

Single-brand retailers and Indian manufacturers with FDI who want to sell their single-brand products through e-commerce also need to comply with a few other conditions set out in PN12. Currently, FDI is permitted up to 100 per cent in Indian entities engaged in single-brand retail trading. FDI beyond 49 per cent requires government approval but below that threshold, it can be under the automatic route.

So far as multi-brand retail trading goes, FDI is permitted up to 51 per cent under the approval route subject to certain funding, sourcing, and other conditions. The FDI Policy on multi-brand retail e-commerce by Indian companies with FDI, however, did not change and the restriction continued by implication. Consequently, Indian companies with FDI who are engaged in multi-brand retail trade are not permitted to undertake B2C multi-brand e-commerce.

Several regulatory snarls and the litigation faced by e-commerce players during the last few years appear to have prompted the DIPP to clarify the FDI Policy on B2B e-commerce space through PN3.

PN3: Laying the boundaries for FDI in B2B e-commerce

As discussed above, FDI of up to 100 per cent was already allowed in B2B e-commerce under the automatic route (that is, without the approval of the government) since 2000. PN3, in addition to reiterating the FDI policy on B2B and B2C e-commerce that is currently in place, has distinguished two models of e-commerce – the “inventory based model” and the “marketplace based model”. It clearly states that FDI of up to 100 per cent will be allowed without any government approval only in “marketplace based models” and that FDI in “inventory based models” is prohibited.

PN3 has also redefined the term “e-commerce” and clearly defined the concept of “e-commerce entities”. It stipulates some operating conditions for e-commerce entities with FDI for undertaking “marketplace based” e-commerce retailing.

“E-commerce” and “e-commerce entities”

The term “e-commerce” has been redefined to mean the “buying and selling of both goods and services, including digital products over both digital as well as electronic network”. This is broader than the previous definition, which was restricted to the buying and selling of goods by a company on an e-commerce platform. The new definition covers services also and clarifies the forms of e-commerce platforms (such as computers, television channels, webpages, and mobiles).

The term “e-commerce entity” on the other hand, has been defined for the very first time. It includes Indian companies, foreign companies, and offices, branches, or agencies owned and controlled by non-residents, which conduct e-commerce business. As a result of this new definition, it is now clear that foreign companies can invest in “marketplace based” B2B e-commerce. This will also enable foreign investors to acquire existing Indian entities operating marketplace B2B e-commerce.

It is, however, interesting that the definition does not include limited liability partnerships (“LLPs”). On a plain reading, it appears that FDI will not be permitted in LLPs that undertake B2B e-commerce. This position, however, contradicts the FDI Policy on LLPs, which was recently amended in PN12 which allowed FDI up to 100 per cent in LLPs operating in sectors where 100 per cent FDI is permitted under the automatic route and where there are no performance-linked conditions. The DIPP should provide some clarity on this front as it could impact the structuring of FDI in the B2B e-commerce space.

“marketplace based” and “inventory based”

As FDI is permitted only in marketplace-based models, it is important to understand the difference between “marketplace based models” and “inventory based models”.

The “marketplace based model” of e-commerce is defined as the provision of an information technology platform by an e-commerce entity on a digital or electronic network. A marketplace-based e-commerce entity, PN3 clarifies, cannot own any inventory by itself. If any marketplace-based e-commerce entity with FDI gains ownership over such products and services, then it will be considered an inventory-based e-commerce entity. Therefore, at no point can a marketplace-based e-commerce entity gain ownership over the goods. The title to the goods and services should remain with the seller.

A marketplace-based model is essentially a B2B model where the e-commerce entity is merely acting as a facilitator between sellers and consumers. In this model, an e-commerce entity will not sell goods or provide services directly to the consumers. The actual sale of goods or services takes place between the seller and the end consumer. The e-commerce entity will earn a commission from the seller for the services provided by it to the seller.

FDI_ECommerce_B2BModel

The “inventory based model” on the other hand, has been defined as e-commerce activity where the inventory of goods and services is owned by the e-commerce entity and those goods and services are sold directly to the consumers. An inventory-based model, therefore, is essentially a B2C model where the e-commerce entity has ownership over the goods and the sale of goods and services takes place between the e-commerce entity and the end consumer.

As we discussed above, PN12 only permitted manufacturers and single-brand retailers to undertake B2C single brand retail trading through e-commerce. If an e-commerce entity with FDI undertakes the inventory-based model, then it could be considered to be undertaking (the currently prohibited) multi-brand retail trading e-commerce.

FDI_Ecommerce_B2CModel

One way to determine whether e-commerce entities are undertaking marketplace-based e-commerce is to examine the treatment of inventory or merchandise in their accounts. If they are accounting the merchandise or inventory in their own balance sheet, then they could be considered “inventory based models’ and will attract penal provisions of the applicable foreign exchange laws.

Operating guidelines for B2B e-commerce: Support functions, pricing of goods and services, and revenue generation

The DIPP has, for the first time, stipulated operating guidelines for marketplace-based e-commerce entities with FDI.

Support functions: E-commerce entities have been allowed to provide logistics, warehousing, order fulfilment, call center, payment collection, and other support functions to the sellers. These support services will allow e-commerce entities to generate revenues for themselves in addition to any commission or fee that may be charged from the seller. Leading e-commerce entities such as Amazon, Flipkart, Jabong, and Myntra provide warehousing services to sellers. As long as they are merely providing support functions to the sellers, they will not be in violation of the policy. PN3 also states that if e-commerce entities undertake payment collection, they should also ensure that their service is in conformity with the relevant RBI guidelines. These guidelines endorse the principles of a marketplace-based B2B model.

Pricing of goods and services: E-commerce entities cannot “directly or indirectly influence the sale price of goods or services” and are obligated to maintain a “level playing field”. This guideline has been seen as a measure to curb the predatory pricing tactics of e-commerce entities and to create a level playing field with offline traders. There have been allegations that leading e-commerce players, in order to attract customers on the platform, are using innovative methods to influence sellers to substantially mark down prices or provide deep discounts on their products and services. For example, some e-commerce entities such as Amazon refund the amount denoting discounts provided by the sellers on the platforms. Some e-commerce players like Patym provide cash back on the products purchased on the platform to the consumers. In a true marketplace-model however, sellers are in control of the pricing of the products and services, and any markdown or discounts on the maximum retail price on the platform are offered directly by the sellers. The e-commerce entity, which is merely a facilitator between the sellers and the consumers, does not influence the pricing of products and services offered by the sellers on the platform in any way.

While PN3 does not explain the parameters for determining “influence”, this guideline is expected to impact offline arrangements (such as the funding of discounts) between sellers and e-commerce entities as they may be considered to amount to influencing sale prices. Despite this regulation, many e-commerce websites continue to provide discounts and cash back offers. The pricing models adopted by sellers and e-commerce entities will need to be studied in greater depth to determine if e-commerce companies are in violation of this provision. The DIPP should clarify the intent of this provision to ensure that e-commerce companies with FDI are not violating this guideline.

Sourcing: E-commerce entities cannot derive more than 25 per cent sales on their platform from a single seller or any of the e-commerce entity’s group companies. This guideline is intended to ensure that e-commerce entities do not carry out B2C e-commerce in the garb of a marketplace model using convoluted business structures. This provision will definitely impact those e-commerce players who derive more than 25 per cent of their sales from their vendors or group companies. For instance, it is reported that both Flipkart and Amazon India generate sales beyond 25 per cent from their group companies, WS Retail Services Private Limited and Cloudtail India Private Limited, respectively. These e-commerce players will need to restructure their business models to toe the line with PN3. Further, there is no clarity on the duration for calculating the cap on sales, that is, whether this cap will be calculated on a financial year basis or otherwise. The DIPP should also clarify the intent of this provision to ensure that e-commerce companies with FDI are not violating this guideline.

Other conditions: The responsibility for the delivery of goods to the customer and customer satisfaction following a sale on the technology platform as well as providing any warranty or guarantee of goods and services lies with the seller. This guideline is in line with the principles of a marketplace-based model. If such responsibility lies with the e-commerce entity, then it will no longer be considered a mere facilitator, and any sale on its platform could take on the colour of B2C multi-brand e-commerce retail, which (as we have discussed previously) is currently prohibited, except for single-brand retailers and manufacturers.

The guideline on the delivery of goods by the seller, however, appears to contradict the guideline which allows e-commerce entities to provide support services to the sellers. This may be a drafting flaw, which the DIPP will need to clarify to ensure that e-commerce companies with FDI are not violating this guideline.

PN3 also states that e-commerce entities are permitted to enter into transactions with sellers registered on the platform on a B2B basis. This guideline is very ambiguous since it does not clarify what kind of B2B business e-commerce entities are expected to transact with sellers on. For example, if the sellers sell their goods to e-commerce entities, it would be considered as a B2B business since e-commerce entities are not the ultimate consumers. This would, however, violate the guideline that e-commerce entities gaining ownership over the goods will no longer be considered marketplace-based e-commerce entities. This ambiguity needs to be clarified by the DIPP.

Going forward – the search for a level playing field

The introduction of PN3 may encourage foreign investors, who may have been hesitant to enter this space till now due to a lack of regulatory clarity, to invest in the Indian e-commerce space. It also provides legitimacy to the existing businesses of e-commerce companies with FDI that have been operating on the marketplace model in India. E-commerce companies with FDI will definitely need to re-examine their business structures to ensure that they are in compliance with PN3.

Having said that PN3 may not really create a level playing field between e-commerce entities with FDI and e-commerce entities without FDI. PN3 could impact e-commerce companies that already have FDI or intend to raise FDI, but not e-commerce companies without FDI. While the FDI Policy will govern only those e-commerce companies with FDI, no similar restrictions apply to e-commerce companies without FDI under other laws. The latter category may, for instance, continue to provide deep discounts on similar products and services or generate revenues beyond 25 percent from a single vendor or group company. Further, there are no similar restrictions on offline retailers without FDI. The government, which is keen on attracting foreign investment in this sector, should re-examine this policy to ensure that the interests of both offline retailers as well as e-commerce entities are adequately protected. While PN3 is a good move, there is room for further fine-tuning a few aspects of the policy by the government, especially with respect to the pricing of products and services and limits on revenue generation.

Swetha Prashant is a Principal Associate at J. Sagar Associates. Divya Sinha is a Junior Associate at the same firm. The views expressed in this article do not represent the firm’s view in any manner.