UPSC Prelims 2022 Q6: FDI Rules for Foreign E-commerce Firms — Explained

With reference to foreign-owned e-commerce firms operating in India, which of the following statements is/are correct?

1. They can sell their own goods in addition to offering their platforms as market-places.

2. The degree to which they can own big sellers on their platforms is limited.

Select the correct answer using the code given below:

1 only
2 only
Both 1 and 2
Neither 1 nor 2

Answer: (b) 2 only

Statement-wise explanation

1: incorrect — Foreign direct investment (FDI) is allowed only in the marketplace model of e-commerce, where the firm runs a platform that connects outside buyers and sellers. FDI is not allowed in the inventory-based model, where the firm owns the goods and sells them to consumers itself. PIB's release of 26 December 2018 on Press Note 2 (2018 Series) says: "FDI is not permitted in inventory based model of e-commerce." So a foreign-owned platform like Amazon India or Flipkart cannot sell its own stock to Indian consumers while also running a marketplace.
2: correct — Under Press Note 2 (2018 Series), in force from 1 February 2019, a seller in which the marketplace or its group companies hold any equity cannot sell on that marketplace. The same applies to a seller whose inventory the marketplace controls. Control is assumed if more than 25% of the seller's purchases come from the marketplace or its group companies. So the rules limit how far these firms can own, or tie themselves to, big sellers on their platforms.

How to eliminate

Basic knowledge settles Statement 1. India has never allowed FDI in multi-brand retail through e-commerce. That is the whole reason Amazon and Flipkart call themselves "marketplaces". A foreign-owned platform selling its own goods would be exactly the inventory model that is banned. Once Statement 1 is out, only two choices remain: Statement 2 alone, or neither statement. Statement 2 is worded loosely ("the degree … is limited"), and loose wording like this is usually true for a regulated sector. Recall the Amazon–Cloudtail story: after the 2018 rules, Amazon's indirect stake in its biggest seller's parent company fell from 49% to 24%. That shows ownership of sellers was indeed restricted. The fact to remember: marketplace model gets 100% FDI through the automatic route; inventory model gets no FDI; a platform may not hold equity in, or control the inventory of, its sellers.

Know more

Two models of e-commerce under India's FDI policy

Feature	Marketplace model	Inventory-based model
What the firm does	Runs an IT platform that links buyers and sellers	Owns the goods and sells them to consumers
FDI allowed?	100%, automatic route	Not allowed for domestic B2C sales
Example	Amazon.in, Flipkart (as platforms)	A foreign retailer's own online store selling in India

Press Note 2 (2018 Series), effective 1 February 2019. The government said it had received complaints that some marketplaces were influencing prices and quietly running inventory models. Main safeguards:

A seller in which the marketplace or its group companies hold equity cannot sell on that platform.
A marketplace is deemed to control a seller's inventory if more than 25% of the seller's purchases come from the marketplace or its group.
No seller can be forced to sell any product only on one platform.
Services such as logistics, warehousing, advertising and payments must be offered to all sellers on fair, non-discriminatory terms.
Cashback and discounts must be fair and non-discriminatory.

Do not mix up the two "25%" rules. Press Note 3 (2016) capped sales from any one seller or its group at 25% of the marketplace's sales. Press Note 2 (2018) dropped that cap and brought in the 25% purchase test for control.

B2B e-commerce has had 100% FDI since Press Note 2 (2000 Series).

2026 update. Press Note 3 (2026 Series), dated 23 July 2026, allows foreign-owned firms to run an inventory model for exports of goods made in India. Selling inventory to Indian consumers is still barred. In August 2026, DGFT added an inventory-based cross-border e-commerce export framework under the Foreign Trade Policy 2023. The 2022 question's answer still stands.

In the news

From 2019 to 2022, foreign-owned platforms were under scrutiny for allegedly breaking the e-commerce FDI rules through sellers linked to them. In August 2021, Amazon and Catamaran Ventures announced they would end their Prione/Cloudtail joint venture in May 2022, right around the 2022 Prelims. Cloudtail had been Amazon India's largest seller.

NCERT Concepts to Revise

Marketplace model of e-commerce: Both statements depend on what the marketplace model allows a foreign-owned platform to do, as opposed to owning and selling stock.
E-commerce: Sets the basic terms: platforms, sellers and buyers, which the FDI rules for e-commerce firms are built on.
Self-preferencing: Favouring platform-linked sellers is the harm that rules on owning big sellers are meant to prevent.
Deep discounting: Deep discounting by platform-linked sellers was a key complaint behind the 2018 tightening of e-commerce FDI rules.