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How foreign e-commerce firms are treading legal waters in India

Amazon India and Flipkart are reportedly taking baby steps towards appeasing small retailers.

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Last week, an offline traders’ body, Confederation of All India Traders (CAIT) kicked off its pan-India protests against Amazon India and Flipkart for deploying “unethical and unfair business practices.” Quite dramatically, thousands of small retailers across the country demanded the Indian government to close down the two e-commerce giants as they held placards saying ‘Amazon-Flipkart Go Back’.

In the past two months, a bunch of retail lobbies like CAIT, All India Mobile Retailers Association, and All India Consumer Products Distributors Federation, have filed official complaints with the Indian government against the predatory pricing by the foreign-owned online retailers.

This comes at a time when India is desperately trying to lure foreign investors, positioning the country as a market with high ease of business. Resolving the matter has become a challenge for the government as it doesn’t want to disappoint either party.

Amazon India and Walmart-owned Flipkart, so far, have put a straight face, denying all the allegations. It’s not their first time to meet resistance in a market abroad. Although companies are reportedly taking baby steps towards appeasing small retailers. According to local media reports, Amazon’s founder and CEO Jeff Bezos is planning an India trip to address small and medium retailer community in a bid to put out the fire.

The eye of the storm

In the second week of September, Amazon India and Flipkart announced their upcoming festive sales—their biggest event of the year. Despite the opposition from small trader associations, the festive sales became a huge hit for the e-tailers, fetching them a total of USD 4.3 billion.

This, in turn, triggered a controversy about the global online retailers flouting the Indian e-commerce foreign direct investment (FDI) norms and distorting the level playing field in the segment.

CAIT has alleged that the online festive sales have impacted offline sales during Diwali, slashing down the business by almost 50% to USD 42 billion (INR 3 lakh crore). A week after the first sales in the first week of October, retail, mobile, and FMCG (Fast-Moving Consumer Goods) industry associations met the minister of Commerce and Industry Piyush Goyal and filed the complaint about Amazon India and Flipkart indulging in “predatory pricing, deep discounting, loss funding, controlling inventory, preferential treatment to few sellers, influencing prices.”

In the eye of the storm is the country’s FDI rules that the government implemented in February 2019 prohibiting online marketplaces from influencing the prices on their platform by giving discounts and controlling the inventory.

Amazon India and Flipkart were summoned by the Commerce Ministry following the complaints, where they denied any wrongdoing and irregularity in their operations. But CAIT had come prepared. The industry body presented emails sent by Flipkart and Amazon India to sellers asking them to offer discounts on a sharing basis and reward them back with credits.

Not only it urged the minister to initiate an audit into the business model of Amazon India and Flipkart, but it also held discussions with the Competition Commission of India on “unethical competition” perpetrated by e-commerce firms.

Conducting an inquiry, the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry ordered Amazon India and Flipkart to disclose the names of the top five sellers, capital structure, and inventory details.

Amidst the increasing scrutiny over predatory pricing strategies, Walmart CEO sent a letter to the PM requesting for a stable and predictable regulatory regime.

Flipkart and Amazon India wrote to the DPIIT to clarify they don’t fund discounts and that their losses are due to investments into building warehouses, logistics networks, and technology.

According to e-tailers, there is no question of predatory pricing as most products listed on their platforms are online-exclusive, meaning it’s not available offline It also refused allegations of giving preferential treatment to certain vendors, as online sellers have “access to a live price dashboard where they can see each other’s price and then independently decide on discount, and they (marketplaces) have no role in either pricing or discounting,” the local media Economic Times reported citing sources.

Earlier in November, India re-released the draft of The Consumer Protection (e-commerce) Rules that bars business practices which can influence consumers’ transactional decisions.

The regulations in e-commerce, however, haven’t been able to address concerns of either offline retailers or online vendors who claim to be forced into selling products at discounted pricing, industry experts say.

The regulatory regime in the Indian e-commerce industry

So what are some of these rules? Here is a look at the current e-commerce regulations and what they entail:

  1. Foreign Direct Investment (FDI) policy in e-commerce sector (Press Note 2): India allows FDI only in online marketplaces. It prohibits FDI in online businesses that have their own inventory of goods and services to sell directly to their customers. In December 2018, the government came out with tighter norms for online marketplaces, aiming to plug in the loopholes exploited by e-tail firms funded by foreign investors. To ensure that e-commerce marketplaces do not sneakily own or control inventory, the new norms barred the foreign-owned e-tailers from selling products from vendors in which they have an equity interest, or in which they have control over the inventory. The rules stipulated that the vendor’s inventory would be considered as being controlled by the online marketplace if more than 25% of the vendor’s purchases are from the marketplace entity, including its wholesale unit. Under the new norms, e-commerce firms are not allowed to enter into exclusive deals with any brand. The FDI regulations also mandate online marketplaces to furnish contact details of the sellers and make sellers liable for post-sales services, warranty, and delivery of goods. Lastly, the new norms require e-commerce marketplaces to not influence directly or indirectly the prices of goods and services, and be non-discriminatory to all vendors.
  2.  Draft National E-commerce Policy:  To create a complete regulatory framework for e-commerce companies, the government came out with the Draft National E-commerce Policy earlier this February, addressing areas such as data security, infrastructure development, marketplace hygiene, domestic market growth, and export promotion. The policy proposes restrictions on sharing of data stored abroad with business entities outside India, third-parties and foreign governments, as well as paves the way for the government to formulate punitive measures in case of the violation of rules. The draft also said the government would create a “legal and technological framework” to restrict the cross-border flow of data collected by IoT devices, e-commerce platforms, social media, and search engines. The policy also includes the new FDI norms that the government implemented starting February 1, 2019. Apart from that, it stresses on capacity building of both physical and digital infrastructure, displaying the details of sellers, processing the refund requests of customers within 14 days, and appointing the Grievance Officer to redress complaints within one month of notification. It also brings under regulations the cross-border e-commerce sites and apps available in India by making it necessary for them to have a registered business entity in the country, and channelizing all the import shipments through the customs route. The government in June said that it would come out with the National E-commerce Policy within the next 12 months.
  3. The Consumer Protection (e-Commerce) Rules, 2019: The Indian government released the draft Consumer Protection (e-Commerce) Rules under amended Consumer Protection Act, 2019 in November, which was the same as the draft E-Commerce Guidelines for Consumer Protection 2019 released earlier in August. Apart from curbing unfair trade practices that may directly or indirectly influence the price of the goods or services to maintain a level playing field, setting up refund policy and grievance processes that draft National E-commerce Policy also addresses, the regulations seek to protect “personally identifiable information” of consumers and require e-commerce firms to submit a self-declaration regarding compliance to the ministry.

The grey areas

The industry insiders KrASIA spoke to claimed that Amazon India and Flipkart have already found loopholes around all of them.

Despite the laws in place, e-commerce giants continue to sell products exclusively and provide users discounts and offers. E-commerce companies claim they have not signed any exclusive deals and that the discounts are given by vendors and brands.

They have also found a way to keep selling products from affiliate companies. For instance, Amazon India has changed the ownership structure of Cloudtail, its largest seller, by reducing its stake from 49% to 24% so that it is no longer its group company which supposedly makes it eligible for selling on the platform (the FDI regulations are not very clear on what equity participation means, hence is open to interpretation).

An online vendor who did not wish to be named said the government is only creating noise.

“The intention of the government is weak as these regulations are not being enforced. The government has to take proactive steps, and we need proper laws for the industry,” the source said.

The source said Amazon India and Flipkart more often than not force the vendors into agreeing to their terms.

“They do all sorts of things including, divide and rule policy. They give preferential benefit to certain parties, resort to predatory pricing, delay payments, changing the prices, and add a new fee overnight,” he told KrASIA. “As the cost of selling online is increasing year on year by 20%, listing with marketplaces is no more viable business. But to be in the game, we continue to work with the e-tailers.”

The industry veteran alleged that e-tailers want vendors to make products exclusively for them and sell at a fixed rate even if it doesn’t make a business sense for vendors.

According to Satish Meena, analyst at Forrester, Amazon India and Flipkart are experts in finding and working in grey areas, as they have faced similar challenges in other markets as well.

“Even if these policies are in place, there is no implementation of them happening on the ground,” Meena told KrASIA. “The government has left out enough grey areas for these companies (e-tailers) to operate so that they can bring in more money, build infra, and give jobs. As long as consumers are getting benefited out of this, no government will change things.”

He said CAIT’s core agenda item is to get the government’s protection for domestic players, but they are not doing anything else, for the retailers, in terms of finding a way for both parties to work together.

“E-commerce as a channel is not going away. So the government has to work out the best possible case for the survival of both of them,” he said.

The upcoming comprehensive National E-commerce Policy is expected to entail all the regulations that have come out over the last 12 to 18 months.

“I don’t think there’s going to be much change in the e-commerce policy which is expected to come in 2020,” Meena said. “The only purpose e-commerce policy will solve that it will remove the confusion and uncertainty on how things would change, which is good for both the local retailer and these e-commerce companies.”