How to start an eCommerce Platform in India as a Foreign Subsidiary Company

India is the 2nd largest market for eCommerce in the world, with a predicted market share of $350 billion by 2030. With eCommerce growing at a CAGR of 14-20%, and a rapid expansion in internet users, digitisation and delivery services, the time to set up an eCommerce platform in India is now. In this comprehensive article by Compliance Calendar, our team allows you to discover how to establish your own ecommerce platform as a foreign subsidiary company in India.

Why should you consider setting up an e-commerce company in India as a foreign subsidiary - Top five reasons

1. Rapidly growing e-commerce adoption: In India, the government recently declared that 100% pin codes have been covered by e-commerce. More than half the transactions in India can be traced to Tier-2 and 3 cities.

2. Funding statistics - A whopping $15.4 billion in funding: Data shows that in the year 2022, eCommerce companies in India accounted for USD 15.4 billion in private equity and venture capital funding. This is a 2x increase from last year, and far higher than the global average in a unique year marred with volatility in investments.

3. A large population on the internet: India recently overtook China as the world’s most populous country. With a large base of digitally literate young population, the demand for e-commerce in India is steadily growing with over 800 million internet users, and 87% of Indian households that would have an internet connection by 2025.

4. Low data prices and a consumption-driven middle class: UPI transactions in India prove the value of low data cost driven, efficient transactions. In terms of numbers, we are ahead of all the digital transactions in the USA, Canada and Germany put With a large base of middle class that engages routinely in online shopping, the future of eCommerce in India is brighter than ever.

5. Sectoral share in eCommerce in India: Roughly half of eCommerce transactions in India pertain to electronics, gadgets and tech-services and products. The other half that is witnessing a massive increase in sales are categories such as fashion, beauty, gaming, banking and food products.

Which e-commerce business model should you choose based on FDI restrictions - Marketplace Model and Inventory Model

In India, there are two types of business models, each with its own prerogatives, FDI limits and caps on selling group products. This distinction is important, as Indian laws provide for 100% automatic Foreign Direct Investment only in the Marketplace Model, and not in the Inventory Model.

Marketplace Model - The FDI guidelines issued in 2020 on multi-brand retailing provide that in a marketplace model (think Amazon or Flipkart as the marketplace entities), the entities cannot control or exercise ownership over the stock of goods. Thus, if Amazon or Flipkart’s group companies start selling products in excess of 25% of the sales on their platform, it will lose its marketplace status and would instead be counted as an Inventory model, where FDI is prohibited. Moreover, the vendors listed on the marketplace entity are prohibited from owning any equity in the entity. Thus, put simply, a seller on Amazon cannot invest or own equity in Amazon.

Inventory Model - In this mode of e-commerce sale, the entity operating the website exercises ownership and control over goods. Thus, a brand like Nike or Puma having their own website for selling their merchandise would qualify as an Inventory Model. In the current legal scenario, the inventory model e-commerce platforms are prohibited from accepting any FDI.

100% FDI under Government approval route for E-Commerce by Food Retail Companies - Under India’s existing FDI policy,100% FDI is provided in food retail segments when the products retailed are manufactured and/or produced in India. Thus, any foreign player engaged in the food business abroad is allowed to set up a food manufacturing company in India as a foreign subsidiary company.

100% automatic FDI in B2B business: As per the FDI policy, contained in the ‘Consolidated FDI Policy Circular 2015’, FDI up to 100% under automatic route is permitted in Business to Business (B2B) E-Commerce Laws.

Permissible conditions for FDI in B2C e-commerce for goods manufactured in India:

• An Indian manufacturer is permitted to sell its products produced in India through e-commerce retail.

• A single-brand retail trading entity operating through brick-and-mortar stores is permitted to undertake retail trading through e-commerce laws.

• It is legal for an Indian manufacturer to sell its single-brand goods through e-commerce retail. The investee business - the owner of the Indian brand must manufacture at least 70% of its products in-house and can source a maximum of 30% of its products from other Indian manufacturers.

• An e-commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies.

• E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services.
  

Incorporation of the Subsidiary Company in India:

1. The first step for entering the Indian market is to incorporate a subsidiary company in India. The regulating law for companies in India is the Companies Act, 2013 and its associated rules.

2. You need to register the company with the Registrar of Companies (ROC) under the Companies Act, 2013. Compliance Calendar has assisted thousands of companies in niche industries in filing for incorporation successfully.

3. The process requires obtaining a Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the proposed directors. There must be at least one Resident Indian director on the board.

4. The draft of the company's Memorandum of Association (MOA) - enlisting specifics of the e-commerce business that the company plans to engage in, and Articles of Association (AOA) regulating the internal procedures, alongside necessary forms (that includes name, registered address, capital limits etc) has to be filed with the Registrar of Companies.

5. An Advanced Reporting Form needs to be filed with the RBI, when share capital is subscribed to, by foreign entities. Filing of Form FC-GPR with RBI must be done within 30 days from date of allotment of shares to subscribers/foreign holding company.

Technical Prerequisites for E-commerce business in India

• Domain Name & Web Hosting Company : Necessities for an online business - Domain name registration refers to your website’s name. It’s important to have an easy, short and dignified domain name. It’s also ideal to register as soon as An early freezing of a domain name for your business assures exclusivity, and helps avoid potential legal battles with another company wanting to obtain your domain name.

• Web Hosting: A web hosting service allows your website to access the infrastructure and servers needed to make it accessible on the internet 24/7. A reliable web hosting service ensures that your e-commerce site loads quickly and performs efficiently.

• Payment Gateways for your e-commerce business - It is important to integrate safe, convenient and popular payment gateways to facilitate smooth transactions for your customers. Options like Paytm, Razorpay, and others are commonly used in India. Payment gateways may often levy a usage or convenience fee, either on your e-commerce portal or on customers, based on your agreement with them.

• Security standards: As a responsible business, your e-commerce website should have features like SSL certificates, firewalls, DDoS protection, and regular backups to safeguard sensitive customer data and protect against cyber threats.

• Shipping, Returns and Refunds Policies: Every e-commerce website is mandated by Indian laws, specifically the Consumer Protection Act, 2019 and the Consumer Protection (E-Commerce) Rules, 2021. Specifically, the returns and refunds policy must allow for refund of durable/semi-durable goods within fifteen days of An e-commerce portal is also prohibited from refusing refunds for defective goods.

Open Network for Digital Commerce : A new platform for e-commerce for small traders and MSMEs

The Open Network for Digital Commerce is an initiative of the government that allows small businesses to take advantage of e-commerce by creating a supportive digital interface. It provides digital infrastructure, network, buying-selling portal, web hosting for goods and other services, by creating a large-scale e-commerce system.

Apostillation and Notarisation requirements for foreign subsidiary company in India

Apostillation refers to the process of certifying foreign company documents issued outside India for use within India. The following are the compliance requirements in this regard:

• Translation of incorporation or registration certificates in English
  

• Copy of ID Proof of each authorized representative in India and number of shares subscribed by them

• Copy of Charter of the Foreign Company

• Form DIR-2 for consent to act as director, to be signed by each

• NOC on the property, in case the property is on lease

• Address Proof, such as rent agreement, lease deed along with copy of utility bills

• For companies belonging to the Commonwealth : all signatures and addresses on MoA and AoA and proof of identity must be notarised by a Notary (Public) in that part of the Commonwealth.

• For countries which are parties to Hague Apostille Convention of countries : the signatures and addresses on MoA and AoA must be notarised by the Notary (Public) of the country of his origin and be duly apostilled in accordance with Hague Convention.

• For countries outside the Commonwealth and Hague Apostille Convention: the signatures and address on the memorandum and articles of association and proof of identity shall be notarized before the Notary (Public) of such country and the certificate of the Notary (Public) shall be authenticated by a Diplomatic or Consular Officer.

Post-registration compliance requirements for e-commerce foreign subsidiary company in India

After registering a company in India, there are several compliance requirements that need to be fulfilled to ensure legal and regulatory adherence. Here are some key post-registration compliance obligations for foreign subsidiary e-commerce companies in India, operating in the Marketplace model or receiving FDI under permissible rules:

• Filing Forms for beneficial ownership: Forms MGT-4, MGT-5 and MGT-6. All of these forms entail providing information on beneficial share ownership. Form MGT-4 with beneficial interest in any share along with a covering letter must be filed within one month from date of acquisition. While BEN-2 is for significant beneficial ownership change, i.e., indirect holding along with direct holding. MGT-6 is for beneficial indirect ownership. Even a single share held by a registered member on behalf of someone else will trigger the requirement for filing of MGT - This must be done within 30 days of the date of receipt of declaration.

• Form DIR-2: for directors

• Form INC-9: for declaration by the first subscribers and

• INC-20 A: This is a mandatory form, required for obtaining a certificate of Commencement of Business. It must be filed within 180 days of the date of incorporation. A bank statement evidencing the receipt of subscription money by the company is necessary.

Documents required for filing form FC-GPR with RBI:

• Board Resolution for Allotment of Shares / Compulsorily Convertible Preference Shares (CCPS)/ Compulsorily Convertible Debentures (CCD)

• Memorandum of Association of the company in case the shares are allotted for the subscription to the Memorandum of Association (MOA)

• Foreign Inward remittance Certificate (FIRC) from AD Bank

• KYC from AD Bank

• Valuation certificate regarding the value of shares from the Chartered Accountant

• CS Certificate in the prescribed format

• Declaration by Authorized representative of the Company

• Debit Authorisation for debiting charges from the Bank

• Declaration regarding issue price by the directors of the Company

• Reason for delay in submission, if any

• FLA Reporting to the RBI: The FLA return must be filed by Indian companies and LLPs receiving FDI during the current year. This form needs to be filed by July 15 of the subsequent financial year.

• Compliance with the Consumer Protection Act: Under the Rule 4(2) of the Consumer Protection Act, 2019 the following is the list of disclosures that the e-commerce entity must mandatorily provide:

  • The legal name of the entity

  • Geographic address of the entity’s headquarters and all branches

  • Name and details of its website; and

  • Contact details of the entity, which include customer care numbers, email address, and information about any grievance officer.

  • The Consumer Rules also requires e-commerce entities to hire a Nodal Officer, who is a resident of India, and this Officer’s role shall be to ensure proper compliance with the Consumer Protection Rules.

• Compliance with Legal Metrology Act: As per Rules framed under the Legal Metrology Act, the following is the list of the declarations that are to be made:

  • Name and address of the manufacturer

  • Country of origin of the product

  • Common/generic name of the product

  • Net quantity

  • Best before/use date (wherever applicable)

  • Maximum Retail Price (which should also mention the words “Inclusive of all taxes”)

  • Dimensions of the product/commodity.

In conclusion, compliance with FDI norms, commercial and consumer laws in India are the foundational elements of setting up a successful e-commerce company. Having assisted niche corporate clientele in drafting user-agreements, incorporating a foreign subsidiary company in India and securing IPR, Compliance Calendar’s bouquet of services can make setting up your e-commerce venture hassle-free.