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Understanding the Legal Divide

India permits 100% FDI under the automatic route in e-commerce, but this is subject to an important caveat; such investment is permitted only for entities operating under the marketplace model. Conversely, FDI is expressly prohibited in inventory-based e-commerce models.

Inventory-based model involves the entity purchasing, owning goods and selling them directly to customers. This resembles traditional retail and is ineligible for foreign investment in B2C e-commerce.

A marketplace model, on the other hand, acts as a facilitator between buyers and sellers. The entity here, provides the platform, facilitates payments, handles logistics and earns commissions for services provided by it. However, it does not take ownership of inventory during the process.

The rationale behind this distinction is clear - allowing foreign-funded entities to control inventory and pricing could enable deep discounting at scale, potentially undermining small domestic retailers that form the backbone of India’s retail ecosystem.

Further, the framework also has certain operational safeguards in place to ensure marketplace entities do not function as disguised inventory-led businesses:

• A seller’s inventory is deemed “controlled” by the marketplace entity if more than 25% of its purchases are sourced from that entity or its group companies.
• Sellers in which the marketplace entity (or its group companies) hold an equity stake, or exercise control, are barred from selling on that platform.
• Exclusivity arrangements between marketplaces and sellers are prohibited.

The above safeguards are closely tied to how “ownership” and “control” are assessed under India’s FDI policy.

FOCC vs IOCC: The Structural Backbone

In this context, entities are often classified as Foreign-Owned and Controlled Companies (FOCCs) or Indian-Owned and Controlled Companies (IOCCs). Marketplace entities with foreign investment are typically set up as FOCCs (often through wholly owned subsidiaries in India) and are therefore restricted from owning or controlling inventory or influencing vendors.

By contrast, entities classified as IOCCs, where ownership and control vest with Indian residents, eligibility to undertake inventory-based operations is not explicitly covered in the FDI Policy.

While the FDI policy focuses on sectoral restrictions, the Master Direction introduces a broader principle that “what cannot be done directly, shall not be done indirectly”. This implies that compliance extends beyond the immediate entity to the overall structure, including parent and subsidiary relationships.

In practice, policy considerations may extend to both the parent and its wholly-owned-subsidiary if the parent is classified as a FOCC. However, certain commercial arrangements have successfully mitigated this by structuring the parent as an IOCC, thereby enabling such models. Notably, this structure has been adopted without any regulatory challenges to date, which provides comfort in its continued viability.

In light of the above regulatory framework, let’s now take a look at the structuring arrangements of some of the most popular Indian E-commerce and Q-commerce businesses and how they’ve navigated through the regulatory requirements.

• 1. Snapdeal has remained a largely pure marketplace player, ensuring full FDI eligibility. Even when it briefly adopted a “controlled marketplace” model by introducing SD+ warehouses to gain operational control over logistics and delivery, not owning inventory ensured it remained FDI-compliant.
• 2. Blinkit presents a striking example of structural transformation. Initially constrained by foreign shareholding, it operated as a marketplace. However, in 2025, its parent entity Eternal Ltd. restructured to increase domestic ownership and qualify as an IOCC. This shift allowed Blinkit to adopt an inventory-led model-enabling tighter control over pricing, margins, and supply chains.
• 3. Amazon has consistently operated as a marketplace but previously relied on affiliated sellers such as Cloudtail and Appario to exert indirect influence over inventory and pricing. Regulatory tightening in 2018–19 forced Amazon to reduce these linkages, restructure seller relationships, and recalibrate its model to remain compliant.
• 4. Flipkart demonstrates a sophisticated dual-entity structure. Its wholesale arm “Flipkart India Pvt. Ltd.” procures inventory as a B2B entity, while its marketplace arm “Flipkart Internet Pvt. Ltd.” facilitates consumer sales without owning goods. This layered model allows it to maintain indirect influence over sourcing and pricing while technically adhering to FDI rules.

As seen from the above regulatory provisions and case studies, India’s FDI framework in e-commerce does more than impose restrictions. It actively determines how firms design their business structures.

It has also made it very clear that FDI eligibility depends primarily on ownership structure and legal classification rather than the degree of operational control exercised in practice.

Meanwhile your father brings you sizzling hot onion pakoras from one of the best tea shops in town called the ‘Iyengar Delight’ which serves hot tea and snacks. Everyone in the city recognizes it, but only a very few from outside the city will know it. This shows that the brand has extreme reputation and strong goodwill only within that locality. This differentiates a “well-known mark” from a “mark with reputation.”

Where does the law actually stand?

The trademark law posits certain grounds under Section 11(6) of the Trade Marks Act, 1999 (“Act”), for a mark to be considered as a “well-known mark”, viz.,

• the acknowledgment the mark has gained amongst the ‘relevant sector of the public’;
• the proof of duration for which the mark is “well-known” and the geographical area where the mark is of use or being promoted or advertised;
• the proof of when and where it is registered or any application has been filed for registration under the Act; and,
• the record of successful enforcement rights by which the trademark has been recognized as a well-known mark by any court or registrar.

On the other hand, Section 29 of the Act speaks about infringement and Section 29(4)(c) stipulates the conditions for a ‘mark with reputation’, that is, the registered trademark has a reputation in India, and the use of the mark without due cause takes unfair advantage of the reputation of the registered trademark. Thus, a mark with reputation is nothing but a criterion to satisfy infringement and does not possess any other additional privileges

In conclusion, a “well-known mark” is where the holder of the mark can initiate a suit for infringement and has an additional privilege of preventing registration of the trademark under any class of goods or services, but a ‘mark with reputation’ is something which is only a prerequisite for infringement.

The Delhi High Court tried to clarify this confusion in Bloomberg Finance Lp V. Prafull Saklecha & Ors., CS (OS) No.2963 of 2012 by establishing that if a trademark is legally recognised as well-known, this status fills the ‘reputation rule’ under Section 29. Likewise, in RPG Enterprises Ltd v. Riju Ghoshal.,2022 SCC OnLine Bom 626, the Court laid down that the words ‘well-known mark’ and ‘mark with reputation’ cannot be used interchangeably as they fulfil two different purposes under the Act. Yet another point to be taken note of is the local reputation criterion. If the intent of Section 29 is looked at, the mark requires reputation in India, but no such condition can be found in Section 11.

2. How Valuation Is Reset in a Down Round

The new valuation in a down round is typically negotiated commercially between the company and incoming investors, based on current business fundamentals - revenue, burn rate, growth trajectory, and comparable market transactions.

Valuation methodologies used include:

• Income Approach (DCF) - revised with more conservative growth assumptions and higher discount rates reflecting increased risk
• Market Approach - recalibrated against current trading multiples of comparable companies, which may have contracted significantly
• Recent Transaction Approach - benchmarked against similar funding rounds in similar-stage companies

The reset valuation determines the price per share at which new investors come in — and this lower price is the trigger for anti-dilution protection mechanisms for existing investors.

3. Investor Dilution — Who Bears the Pain?

Dilution in a down round is not felt equally. Its impact depends on the type of shares held and other terms in the shareholders agreement.

Founders typically bear the most dilution. They hold common equity with no downside protection. A lower valuation combined with a larger share issuance to new investors and potential conversion adjustments for existing investors can significantly erode their ownership percentage.

Early-stage investors without anti-dilution protection face the same fate as founders, their percentage stake shrinks without any compensatory adjustment.

Investors with anti-dilution protection are partially shielded. The practical effect of anti-dilution clauses is that the dilution burden shifts — away from protected investors and onto founders, early stage investors and employees holding ESOPs.

4. Key Considerations Before and During a Down Round

Companies navigating a down round should address the following before closing the transaction:

• Review all existing investor agreements for anti-dilution clauses, consent rights, and pre-emptive rights — these may require formal waivers before new shares can be issued
• Obtain a fresh independent valuation to support the new price - this is essential for regulatory compliance and for defending the pricing to existing shareholders
• Assess accounting reclassification risk - review whether any convertible instruments or preference shares need to be reclassified following the reset
• Communicate proactively with ESOP holders - a down round resets FMV and affects the value of unvested and vested options; timely communication avoids disputes
• Board and shareholder approvals - fresh issuance of shares requires board approval and, in most cases, a special resolution from shareholders under the Companies Act

5. Conclusion

Down rounds are a structural feature of startup ecosystems — not an anomaly. In India, where valuations ran ahead of fundamentals through much of 2020-21, corrections were inevitable. The companies that navigate down rounds well are those that plan for them with robust shareholder agreements, clean cap table documentation, independent valuations, and transparent communication. A down round need not define a company's trajectory. But how it is managed almost always does.