Rationalise regulations for e-commerce

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Rationalise regulations for e-commerce

Thursday, 09 May 2024 | Uttam Gupta

Rationalise regulations for e-commerce

When the Government expects foreign companies to do almost everything that a retailer does, how can it deny these firms the right to sell?

Way back in 2019, Delhi Vyapar Mahasangh (DVM) an organisation of retail traders in the national capital had lodged a complaint with the Competition Commission of India (CCI) alleging anti-competitive behaviour by Amazon Seller Services (ASS) and Flipkart Internet Private Limited (FIPL).  

The CCI is an authority established under the Competition Act, of 2002. The Act prohibits anti-competitive agreements and abuse of dominant position by enterprises and regulates mergers, amalgamations acquisitions etc to ensure that there is no adverse effect on competition. Amazon and Flipkart are global giants operating e-commerce marketplaces in India through their subsidiaries, the ASS and the FIPL.

DVM argued that ASS and FIPL had entered into exclusive sales agreements with smartphone makers to sell certain phones through a small number of preferred sellers. It also alleged that they had given preferential treatment to certain sellers by giving them higher search rankings and offering to pay for part of the discount that such sellers would offer during key sales periods such as Flipkart’s Big Billion Days and Amazon’s Prime Day.

On January 13, 2020, the CCI initiated an investigation under Section 26(1) of the Competition Act, 2002. Prima facie, the CCI agreed with DVM’s contention and ordered a probe by the Director General (DG) - Investigation. ASS and FIPL approached the Karnataka High Court (KHC) with a plea to quash the CCI order. The KHC refused to quash it. The duo challenged the order in the Supreme Court (SC). In August 2021, the SC too dismissed their applications and ordered that “the CCI - DG will complete the probe.

Now, the CCI-DG has come up with its findings.

The investigation has charged Amazon and Flipkart with violation of antitrust laws. Leveraging their substantial financial resources, they have indulged in ‘predatory pricing’ and forged exclusive partnerships with selective sellers. Predatory pricing is the illegal business practice of setting prices extremely low albeit by offering heavy discounts to consumers in an attempt to eliminate the competition and establish a monopoly. This has resulted in the shutdown of thousands of small and medium enterprises (SMEs).

 It has specifically targeted Amazon for certain practices, especially with Cloudtail India Pvt Ltd (a firm set up by a JV namely Prione Business Services (PBS) established by Amazon, in collaboration with an Indian entity owned by Narayan Murthy of Infosys) a “preferred” seller on Amazon’s marketplace and other in-house sellers. Similarly, Flipkart has been investigated for its links to platform sellers, which contravenes new e-commerce regulations.

What has led to the violations?

This can’t be attributed solely to the use of financial muscle by these companies as alluded to by the CCI - DG. This has a lot to do with the rules introduced in early 2016, through which the Government allowed 100 per cent foreign direct investment (FDI) under the so-called e-commerce marketplace model.

The marketplace is a platform where vendors sell their products directly to consumers even as its owner (read: Amazon/Flipkart) merely acts as a facilitator by providing services such as booking orders, raising invoices, arranging delivery, accepting rejections etc. She can’t hold inventory or undertake direct selling. The policy intent was abundantly clear. The foreign investor in the marketplace wasn’t supposed to invest in the inventory model.

However, the intent wasn’t reflected in the Press Note (PN) issued by the Department for Promotion of Industry and Internal Trade (DPIIT) in the Ministry of Commerce and Industries. While drafting the fine print, a clever bureaucrat blurred the demarcation between the marketplace where 100 per cent FDI was allowed and the inventory model where it wasn’t. The PN (2016) prescribed two conditions. First, the foreign entity owning marketplace cannot permit more than 25 per cent of total sales on the marketplace from one vendor or its group companies. Two, it cannot directly or indirectly influence the sale price.

In the absence of specifying who that vendor should be, it made way for a company linked to the owner of the marketplace to get in. The latter could set up four companies (call them subsidiaries or JVs) and control 25 per cent of each of the total sales on the platform. Contrary to the policy intent, which prohibited foreign investors from direct selling, the fine print did just the opposite. 

Having allowed its entities to control almost all of the sales made on the marketplace, it would be naïve to expect that an anti-competition situation won’t emerge. With such rules in place, it was a foregone conclusion that Amazon et al would have exclusive partnerships with selective sellers who - acting in concert with the former - would indulge in predatory pricing and give heavy discounts leading to the annihilation of thousands of SMEs. Following a complaint from the SMEs, on December 26, 2018, the DPIIT clarified that “the owner of the marketplace or its subsidiary or its joint venture (JV) with an Indian company can’t have ownership of the seller.” Further, “a seller on the platform can’t source more than 25 percent of its inventory from a firm connected with the latter.”

Foreign investors can circumvent the first rider by having less than 50 per cent shareholding in the seller firm and arguing that they have no control (majority) over the latter. The marketplace owner can also sell his ‘own’ product - albeit through its wholesale arm - on the platform. All that the wholesale arm needs to ensure is to restrict supplies to the seller within the 25 per cent threshold.

The clarification/modification in the conditions through December 26, 2018, hasn’t helped much in improving the situation.

A few sellers, some of them still maintaining connection with the marketplace owner continue to dominate the e-commerce platform. For instance, only three dozen firms out of the 400,000 sellers on the ASS platform account for 67 per cent of sales on it. Meanwhile, in 2020, the Department of Consumer Affairs (DCA), in the Ministry of Consumer Affairs, Food and Public Distribution, issued the Consumer Protection (e-commerce) Rules, under Section 101 of the Consumer Protection Act, 2019. The rules bar affiliated entities from selling on e-commerce platforms, restrict ‘flash sales,’ and disallow sellers from using the name or brand associated with the marketplace e-commerce entities for the promotion of goods. In 2021, DCA made amendments to restrict business-to-business, or B2B, sales in e-commerce and a provision to prevent an ‘abuse of dominant position’ by e-commerce firms. The Government is also working on a comprehensive policy on FDI in e-commerce that will give primacy to the above rules. If it goes ahead with such a policy, it will be tantamount to a retrospective change of policy and send a wrong signal to foreign investors. 

The present mess owes it to the very idea of the marketplace which is flawed. When, the Government expects foreign companies to do almost everything that a retailer does viz. booking orders, raising the invoices, arranging the delivery, accepting rejections and so on, how can the former deny the latter right to sell?

The way forward is to shun this idea; instead, allow 100 per cent FDI in retail. The bureaucrats had already done it but in a ‘subtle’ way. The Government should make it obvious and straightforward. Moreover, 100 per cent FDI should be permitted to all retailers, online or offline, big or small for a level playing field.

(The writer is a policy analyst; views are personal)

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