E-Commerce FDI Policy (Press Note 2 of 2018)

By Anuj Singh | Updated March 2026

What Is the E-Commerce FDI Policy?

India's E-Commerce FDI Policy governs how foreign companies can invest in and operate e-commerce businesses in India. The policy, consolidated under Press Note 2 of 2018 (PN2) issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on December 26, 2018, and effective from February 1, 2019, draws a sharp distinction between two business models: the marketplace model (permitted for FDI) and the inventory-based model (prohibited for FDI). This single policy distinction has shaped the operations of every major foreign e-commerce player in India — including Amazon, Flipkart (Walmart), and their competitors.

For foreign investors, the e-commerce FDI rules are among the most consequential and heavily scrutinized regulations in India. The policy imposes conditions on marketplace platforms that go well beyond the marketplace-vs-inventory distinction — including restrictions on seller concentration, equity participation in sellers, pricing influence, and exclusive partnerships. Violations can result in reclassification as inventory-based e-commerce (triggering a complete FDI prohibition) and penalties under FEMA of up to three times the amount involved.

Legal Basis

• Press Note 2 of 2018 (December 26, 2018) — Issued by DPIIT (then DIPP), amending paragraph 5.2.15.2 of the Consolidated FDI Policy. Effective February 1, 2019. This is the primary governing instrument for e-commerce FDI.
• Consolidated FDI Policy (updated periodically) — The master document issued by DPIIT consolidating all FDI regulations, including the e-commerce provisions.
• FEMA Notification No. FEMA 20(R)/2017-RB — The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, which provides the FEMA framework for FDI compliance, including sectoral conditions.
• Press Note 3 of 2020 — Amended FDI policy to require government approval for investments from countries sharing a land border with India (China, Pakistan, Bangladesh, etc.), applicable to e-commerce entities as well.
• Section 13 of FEMA, 1999 — Prescribes penalties for contravention: up to three times the sum involved in the violation, or INR 2 lakh where the amount is not quantifiable, plus INR 5,000 per day for continuing violations.
• Consumer Protection (E-Commerce) Rules, 2020 — While not an FDI regulation, these rules impose additional compliance obligations on e-commerce entities, including disclosure requirements and prohibition on manipulating prices.

Marketplace vs. Inventory-Based Model

The entire FDI framework for e-commerce rests on the distinction between these two models:

The Critical Nuance: "Control Over Inventory"

The most contentious aspect of PN2 is the determination of when a marketplace platform is deemed to "control" inventory, crossing the line into the prohibited inventory-based model. Under the policy:

• If a seller purchases more than 25% of its inventory from the marketplace entity or its group companies, the marketplace is deemed to have control over that seller's inventory
• If the marketplace entity or its group companies hold equity participation in a seller, that seller cannot sell on the platform
• These provisions are designed to prevent the "marketplace-in-name-only" model, where the platform effectively operates as a retailer through controlled sellers

Key Conditions Under Press Note 2 of 2018

1. Seller Concentration Cap

No single seller — or group of sellers under common ownership or control — can contribute more than 25% of the total sales value on a marketplace platform in any financial year. This prevents a platform from functioning as a de facto retail outlet for a single preferred vendor. The "group company" definition uses a threshold of 26% or more voting rights or the power to appoint more than 50% of the board of directors.

2. Equity Participation Ban

An entity in which the marketplace entity or its group companies hold equity participation is not permitted to sell its products on the marketplace platform. This is one of the strictest conditions — it prevents a foreign e-commerce giant from investing in a seller company and then giving that seller preferential access to its platform.

3. Fair and Non-Discriminatory Dealings

Services provided by the marketplace to sellers — including logistics, warehousing, advertising, and fulfillment — must be on fair, reasonable, and non-discriminatory terms. Different terms for similarly situated sellers constitute a violation. This targets the practice of offering select "preferred sellers" better warehouse access, faster delivery, or lower commission rates.

4. No Price Influence

The marketplace entity cannot directly or indirectly influence the sale price of goods or services. This includes platform-funded discounts, where the platform absorbs losses to offer below-market prices. Cashback offers from the platform must also be fair and non-discriminatory — they cannot be targeted to benefit specific sellers or product categories.

5. No Exclusive Partnerships

Marketplace entities cannot mandate or incentivize sellers to sell exclusively on their platform. Product launches exclusively on one platform (common globally) have been scrutinized under this provision.

6. Annual Compliance Certification

E-commerce entities with FDI must obtain an annual statutory auditor's certificate confirming compliance with all PN2 conditions. This certificate must be filed with the Reserve Bank of India (via authorized dealer banks) by September 30 of each year.

B2B E-Commerce: A Different Regime

The restrictions above apply to B2C (business-to-consumer) e-commerce. B2B (business-to-business) e-commerce operates under a separate and more liberal regime:

100% FDI under the automatic route is permitted in B2B e-commerce without the marketplace-vs-inventory distinction. Foreign companies can operate B2B platforms that own inventory, influence pricing, and have equity in sellers — none of the PN2 restrictions apply to the B2B segment.

Enforcement and Investigations

The e-commerce FDI rules have been among the most actively investigated regulations in India:

• Competition Commission of India (CCI): In 2024, the CCI found Amazon and Flipkart guilty of favoring select sellers on their platforms — a practice that potentially violates the fair and non-discriminatory dealing requirements of PN2. Both companies have denied the allegations and appealed.
• Enforcement Directorate (ED): The ED has intensified its probe into whether Amazon and Flipkart violated FDI regulations by exerting control over vendors on their platforms. The investigation focuses on the relationship between the platforms and their "preferred sellers" — entities like Cloudtail India (an Amazon-affiliated seller that was restructured in 2022) and RetailNet (a Flipkart-affiliated seller).
• FEMA penalties: Under Section 13 of FEMA, violations can attract penalties of up to three times the sum involved. For a marketplace with annual gross merchandise value of INR 50,000 crore, even a technical reclassification as inventory-based could expose the entity to catastrophic penalties.

Impact on Major Foreign E-Commerce Players

The PN2 restrictions have forced foreign e-commerce companies to restructure their Indian operations significantly:

• Amazon India: Restructured its seller relationships in 2022, unwinding its investment in Cloudtail India (a joint venture with Catamaran Ventures that was Amazon's largest seller). Amazon now operates strictly as a marketplace, with no equity in sellers.
• Flipkart (Walmart): Walmart acquired Flipkart for USD 16 billion in 2018 — just months before PN2 was issued. Flipkart restructured its seller network to comply with the 25% concentration cap and equity participation restrictions.
• Chinese platforms: Companies like Shein re-entered India through licensing partnerships (Shein partnered with Reliance Retail in 2023), while cross-border platforms like AliExpress and Temu sell directly from overseas warehouses — a model that technically falls outside the scope of Indian FDI regulations.

How This Affects Foreign Investors in India

For foreign entrepreneurs and investors considering an e-commerce venture in India:

• Structure is everything: The choice between marketplace and inventory models is not merely operational — it determines whether FDI is permitted at all. A foreign-funded entity that is found to control inventory (even indirectly) faces a complete prohibition on foreign investment.
• Seller relationships require careful structuring: Any commercial relationship between the platform and its sellers — warehousing, logistics, advertising, exclusive launches — must be documented and justified as fair and non-discriminatory.
• Press Note 3 (2020) adds a layer for Chinese investors: E-commerce investments from countries sharing a land border with India (primarily targeting Chinese investors) require prior government approval, regardless of the model.
• Single-brand retail is separate: Single-brand retail trading (where a foreign brand sells its own products) allows up to 100% FDI under the automatic route — but this is a separate policy from the e-commerce regulations and requires at least 30% local sourcing from India if FDI exceeds 51%.
• Food retail carve-out: 100% FDI is permitted under the government approval route for e-commerce of food products manufactured or produced in India.

Common Mistakes

• Assuming "marketplace" means no operational involvement. Foreign platforms often believe that simply connecting buyers and sellers qualifies as a marketplace. However, providing warehousing, offering return handling, guaranteeing delivery times, and bundling logistics can be interpreted as exercising control over the transaction — potentially crossing into inventory-based territory.
• Ignoring the group company definition when assessing the 25% cap. The 25% seller concentration cap applies to a seller and its group companies combined (26% voting rights or 50% board control). Two nominally independent sellers controlled by the same promoter count as one group. Platforms that fail to monitor beneficial ownership of sellers risk technical violations.
• Providing differential commercial terms to select sellers. Offering lower commission rates, preferential listing, faster payment cycles, or exclusive advertising slots to certain sellers violates the fair and non-discriminatory dealing requirement — even if done through a separate "premium seller" program with ostensibly objective qualification criteria.
• Conflating B2B and B2C rules. The PN2 restrictions (25% cap, equity ban, price neutrality) apply to B2C marketplace platforms. B2B e-commerce operates under a fully liberalized regime with 100% FDI and no such restrictions. Foreign companies planning a B2B platform sometimes unnecessarily constrain their operations by applying B2C rules.
• Not obtaining the annual statutory auditor certificate. The compliance certification filed with RBI by September 30 each year is not optional — it is a condition of the FDI approval. Missing this filing creates a documentary gap that can be raised during ED or RBI investigations, even if the entity is substantively compliant.

Practical Example

NovaShop Pte Ltd, a Singapore-based technology company, wants to launch a consumer e-commerce platform in India. It incorporates NovaShop India Pvt Ltd as a wholly-owned subsidiary with 100% FDI under the automatic route, structured as a marketplace platform. NovaShop India signs up 500 sellers and processes INR 200 crore in gross merchandise value (GMV) in Year 1.

Problem: One of the sellers — TechDirect India LLP — is partially owned by NovaShop Singapore's CTO (who holds 30% of TechDirect). TechDirect accounts for INR 60 crore (30%) of NovaShop India's total sales.

Two violations arise:

• Equity participation violation: A group company/connected person of the marketplace entity holds equity in a seller operating on the platform — TechDirect must be removed from the platform, or the equity must be divested
• 25% concentration cap breach: TechDirect contributes 30% of platform sales (above the 25% cap). NovaShop India must either reduce TechDirect's sales proportion below 25% or onboard enough additional sellers to dilute the concentration

Consequences if not corrected:

• NovaShop India risks reclassification as an inventory-based e-commerce entity — making the entire 100% FDI non-compliant
• FEMA penalty: up to three times the FDI amount involved. If total FDI invested is INR 50 crore, the potential penalty is up to INR 150 crore
• The statutory auditor will be unable to certify compliance in the annual certificate filed with RBI by September 30
• ED investigation risk, as seen in the ongoing Amazon/Flipkart probes

Resolution: NovaShop's CTO divests the 30% holding in TechDirect before the end of the financial year. NovaShop India onboards 200 additional sellers to organically dilute TechDirect's sales share below 25%. The statutory auditor reviews the restructuring and issues the compliance certificate. Total cost of restructuring: approximately INR 15 lakh in legal and compliance fees — a fraction of the INR 150 crore potential FEMA penalty.

Key Takeaways

• India permits 100% FDI under the automatic route for marketplace e-commerce only — inventory-based e-commerce is entirely prohibited for FDI
• Press Note 2 of 2018 (effective February 1, 2019) imposes conditions including a 25% seller concentration cap, equity participation ban, fair dealing requirements, and no price influence
• B2B e-commerce is fully liberalized with 100% FDI and none of the PN2 restrictions
• Violations can trigger reclassification as inventory-based (making all FDI non-compliant) and FEMA penalties of up to three times the sum involved
• Amazon and Flipkart face ongoing CCI and ED investigations for alleged PN2 violations — enforcement is active and increasing
• An annual statutory auditor certificate confirming compliance must be filed with RBI by September 30

Planning to launch or invest in an e-commerce platform in India? Beacon Filing provides FDI structuring, marketplace compliance review, and FEMA advisory for foreign e-commerce investments.