"Foreign-owned e-commerce companies can't hold inventory in India": What FDI Policy actually requires after Press Note 3 of 2026

A foreign brand wants to manufacture in India and sell to customers in Europe and the US off its own website. Its counsel says no — FDI-backed e-commerce entities in India cannot own inventory, only run a marketplace. So the brand builds a convoluted structure: an Indian manufacturing arm, an unrelated domestic trading company that takes title, and a foreign entity that buys from it. Three layers, three sets of margins, and transfer pricing exposure at every hinge. That advice was correct until 23 July 2026. It is now wrong for exports, and the structure is unnecessary.

What the regulation actually says

India's FDI policy on e-commerce sits at paragraph 5.2.15.2 of the Consolidated FDI Policy, given statutory effect through the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 made under the Foreign Exchange Management Act, 1999. The long-standing position has two limbs.

The marketplace model — an entity that provides an IT platform on a digital network to act as a facilitator between buyer and seller — permits 100% FDI under the automatic route. The platform may not own the inventory it lists, and may not exercise ownership or control over the goods. Doing so converts the model into an inventory-based one.

The inventory-based model — where the e-commerce entity itself owns the goods and sells directly to consumers — has been prohibited for FDI entirely. Not "government approval route." Prohibited. This is the rule that has shaped every foreign-invested consumer platform structure in India for the better part of a decade, and it is why the marketplace-plus-preferred-seller architecture became the default.

What changed. On 23 July 2026, DPIIT issued Press Note No. 3 of 2026, inserting a new paragraph 5.2.15.2.5 into the FDI Policy. It permits an e-commerce entity with foreign investment to operate an inventory-based model solely for the export of goods and products manufactured and/or produced in India. Within that carve-out, the entity may procure, own, warehouse, and export goods directly to overseas customers.

Three boundaries define the carve-out precisely, and each one matters:

• Exports only. The relaxation does not touch domestic B2C sales. An FDI-backed entity still cannot own inventory and sell it to a customer in India.
• Made in India only. The goods must be manufactured and/or produced in India. Importing goods into India to warehouse and re-export them is not covered by this paragraph.
• The rest of 5.2.15.2 survives intact. The marketplace conditions — no control over inventory, no influence over sale price, the seller-concentration restrictions, the requirement that warranty and post-sale liability sit with the seller — continue to apply unchanged to the domestic side of any business.

Route and approval. E-commerce activities permitted under 5.2.15.2 fall under the automatic route, meaning no prior DPIIT approval is required before investing. That said, the Press Note 3 of 2020 land-border restriction (an unrelated press note with a confusingly similar number) is untouched: an investor from a country sharing a land border with India, or whose beneficial owner is situated in such a country, still requires government approval regardless of sector. So does any investment where the beneficial ownership test bites. Automatic route means automatic route for everyone else.

Practical implications

Getting the classification wrong here is not a paperwork problem.

If you own inventory for domestic sale. An FDI-backed entity operating an inventory-based model for the Indian market is carrying on an activity in which foreign investment is prohibited. That is a contravention of Section 6 of FEMA read with the NDI Rules, and it attracts compounding proceedings before the RBI under Section 15. Penalties are computed on the amount involved, and the contravention is continuing — it accrues for as long as the structure operates. In severe cases the Enforcement Directorate issues a show cause notice under Section 13, where the penalty ceiling is three times the sum involved.

If you over-engineer around a restriction that no longer exists. The three-layer structure described at the top of this article now produces avoidable damage: a related-party chain that requires transfer pricing documentation and a Form 3CEB filing, margin leakage at each transfer, and a Permanent Establishment argument the tax authority will happily make against the foreign buyer. Collapsing the structure post-Press Note 3 is straightforward for new entrants and messier — but usually worthwhile — for existing ones.

At exit. Diligence on a sale or a Series round will test FDI compliance from incorporation. An inventory-based domestic model that was never permitted is the kind of finding that produces an indemnity holdback, a price reduction, or a dead deal. Buyers do not take compounding risk on faith.

If you mix export and domestic inventory in one entity. This is the live risk created by the new paragraph. Nothing in Press Note 3 says you must ring-fence, but if Indian-manufactured stock sits in one warehouse under one entity and some of it is sold domestically off your own platform, you have an inventory-based domestic sale by an FDI entity. Books that cannot separate the two are books that cannot defend the structure.

Step-by-step: what to do

• Classify your model in writing before you incorporate. Marketplace, inventory-for-export under 5.2.15.2.5, or a hybrid. Record which paragraph of the FDI Policy each revenue line sits under. This document is what you hand to diligence three years from now.
• Run the land-border test on your cap table. Check every investor and every beneficial owner against the Press Note 3 of 2020 restriction as amended by Press Note 2 of 2026. If it applies, you file on the FIFP / NSWS portal under the DPIIT SOP dated 4 May 2026, which supersedes the 2023 SOP and consolidates filings into a unified portal. Do not begin operations pending approval.
• Incorporate the Indian entity and complete name approval, SPICe+ incorporation, PAN, TAN, GST registration, and IEC (Importer Exporter Code) from DGFT. You cannot export without an IEC — this is the step foreign founders most often discover too late.
• Bring in the share capital through banking channels and obtain the FIRC and KYC report from your AD Category-I bank. Allot shares within 60 days of receipt of funds, at a price not below fair value determined per the NDI Rules pricing guidelines.
• File Form FC-GPR on the RBI FIRMS portal within 30 days of allotment, with the valuation certificate and CS certificate attached. This is a hard deadline; late filing attracts a Late Submission Fee and, past a point, compounding.
• Build the export/domestic separation into your systems on day one. Separate SKU tagging, separate warehouse zones or bins, separate ledgers. If you later add a domestic marketplace arm, that arm must not take title to goods.
• Document the "manufactured and/or produced in India" trail. Supplier invoices, manufacturing agreements, and Certificates of Origin. The carve-out depends on this fact, so treat it as an evidentiary obligation, not a commercial detail.
• Diarise the annual filings. The FLA return (Foreign Liabilities and Assets) is due to the RBI by 15 July each year for every Indian company with foreign investment. Add Form 3CEB by the transfer pricing due date if you have related-party transactions with the foreign parent.

FAQ

Can we import goods, warehouse them in India, and export them under this relaxation?
No. Paragraph 5.2.15.2.5 is limited to goods manufactured and/or produced in India. Imported stock held for re-export is outside the carve-out and should be structured through a bonded warehouse, FTWZ, or SEZ route instead.

Does this let us sell to Indian customers if we also export?
No. The domestic prohibition on inventory-based FDI e-commerce is unchanged. If you want a domestic presence, it must be a genuine marketplace: you facilitate, you do not take title, you do not control the sale price.

Do we need government approval to set this up?
Not on sector grounds — e-commerce under 5.2.15.2 is automatic route. But run the land-border beneficial ownership test independently. If any investor or beneficial owner traces to a land-bordering country, you need DPIIT approval via the FIFP/NSWS portal before investing, and that is a separate question from the sector cap.

Planning India entry?

Start with a free structure review at makeitlegit.in — we will tell you which paragraph of the FDI Policy your model actually sits under before you incorporate around the wrong one.

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Regulatory position stated as at 26 August 2026. Press Note No. 3 of 2026 (DPIIT) dated 23 July 2026; Consolidated FDI Policy; FEMA 1999 and the NDI Rules 2019 as amended. Note also that the RBI's draft FEMA (Foreign Investment) Rules, 2026, released 21 July 2026, propose to replace the NDI Rules 2019 in full — comments closed 31 August 2026 — so the framework cited here may be renumbered in due course.