Analysing Quick Commerce Models and FDI Regulations in India

In recent years, quick commerce platforms in India, such as Blinkit and Zepto, have adopted the ‘dark stores’ model to enable faster delivery to customers. A dark store is a local inventory warehouse placed within a 2-4 km radius of the customer base, aiding quicker deliveries. This model, adopted by platforms, significantly improves delivery time, offering a competitive edge in the fast-paced commerce market. [1]

However, while dark stores improve delivery efficiency, their ownership directly impacts the permissible foreign direct investment (“FDI”). E-commerce is defined under the FDI policy as the buying and selling of goods and services through digital and electronic networks. Quick commerce, though not explicitly defined, falls within E-commerce's ambit, attracting the FDI policy. The policy recognizes two types of E-commerce models: the inventory-based model and the marketplace-based model. [2]

Inventory-Based vs. Marketplace-Based E-Commerce Models

The inventory-based model refers to E-commerce platforms that own the inventory of goods they sell directly to consumers. [3] In contrast, the marketplace-based model refers to platforms that act as facilitators, wherein the inventory is owned by third-party sellers. [4] The model followed by quick- commerce platforms like Blinkit, Zepto, or Instamart is unclear.

FDI Policy and E-Commerce Platforms

India’s FDI policy sets clear guidelines for FDI in the E-commerce sector. Following are the key points that apply to E-commerce platforms:

1. Marketplace-based E-commerce entities are eligible for 100% FDI under the automatic route. [5]

2. Inventory-based E-commerce models are prohibited from raising FDI. [6]

3. B2B transactions can be undertaken by marketplace E-commerce entities with sellers registered on their platform but cannot exercise ownership over the inventory. [7]

4. Marketplace E-commerce platforms can offer support services but are prohibited from owning or exercising control over the inventory, as doing so would shift the business to the inventory- based model. A seller’s inventory will be considered controlled by the E-commerce marketplace entity if over 25% of the seller’s purchases come from the marketplace or its affiliated companies. [8]

5. Marketplace E-commerce entities must maintain a level playing field on their platform, ensuring that no seller receives preferential treatment, including pricing or marketing support. [9]

6. Understanding the nuances of these regulations is pertinent for platforms like Blinkit, Zepto and Instamart to remain compliant while expanding their market presence.

The Emergence of Food Delivery Services

Recently, Zepto has introduced the Zepto Cafe, a food delivery platform that sells bakery products and other food items. Zepto Cafe does not tie up with restaurants like Zomato and Swiggy. It runs under its own brand name, delivering food directly under the 'Zepto Cafe & banner'. This change further complicates the structure, bringing in new regulatory issues.

For such ventures, two major regulatory models under the FDI policy are involved:

1. Manufacturing and E-Commerce Model:

If platforms manufacture food in-house or through contract manufacturing in India, they are entitled to 100% FDI through the automatic route in the manufacturing sector. The manufacturer can later sell products through wholesale or retail, including E-commerce, without obtaining government approval. [10]

2. Single Brand Retail Trading (SBRT):

If platforms source food products from third-party vendors, affix their brand, and sell them via quick commerce, they fall under the Single Brand Retail Trading (“SBRT”) model. FDI in SBRT is allowed under the automatic route, but there are sourcing requirements. If FDI exceeds 51%, such platforms must source at least 30% of goods from India, preferably from MSMEs, artisans, and cottage industries.

This model allows platforms to operate online before opening physical stores. However, physical stores should be established within two years of beginning such online retail. [11] At present, it is unclear which model has been adopted by Zepto. Amidst the allegations against Zepto for FDI violations, it is pertinent to ensure that all the vertices of the business are aligned with the FDI policy. [12]

Which Route Is Better for Food Delivery?

For platforms like Zepto Cafe, the manufacturing and E-commerce model appears to be the more feasible choice. This route offers greater flexibility in terms of FDI and doesn’t have mandatory ancillary requirements. If platforms do not want to undergo the manufacturing process and directly source the products from third-party vendors, the SBRT Model may be more appropriate. Though it provides ease of direct sourcing, the restraints on sourcing can be challenging for certain platforms.

Conclusion

The quick commerce industry has seen rapid growth after adopting the ‘dark store’ model. It is pertinent to comply with the FDI policy to ensure smooth operations. The marketplace model has aided the quick commerce platforms in the grocery sector, but when it comes to food delivery, platforms need to examine which model suits their needs better. While each model offers its own benefits, staying aligned with FDI regulations is key to long-term success. By adopting an accurate model and complying with the regulations, these platforms can keep growing while staying within India’s legal framework.

References

[1] Supriya Roy, 10-minute delivery bright spot for ‘dark’ stores, TIMESOFINDIA (Dec 21, 2024)
https://timesofindia.indiatimes.com/business/india-business/10-minute-delivery-bright-spot-for-dark-
stores/articleshow/116517287.cms

[2] Consolidated FDI Policy, 2020, Clause 5.2.15.2.

[3] Id., Clause 5.2.15.2.2(iii).

[4] Id., Clause 5.2.15.2.2(iv).

[5] Id., Clause 5.2.15.2.3.

[6] Id.

[7] Id., Clause 5.2.15.2.4.

[8] Id.

[9] Id.

[10] Id., Clause 5.2.5.

[11] Id., Clause 5.2.15.3.

[12] CAIT Urges Piyush Goyal to intervene against violations by Quick Commerce Companies, CAIT (Jan 15, 2025) https://cait.in/2025/01/15/cait-urges-piyush-goyal-to-intervene-against-violations-by- quick-commerce-companies/; Ishika Gupta, Zepto Cafe Expands to New Cities Amidst FDI Violation Allegations, MEDIANAMA (Nov 19, 2024) https://www.medianama.com/2024/11/223-zepto-cafe-expands-to-new-cities-amidst-fdi-violation-allegations/