[Dibya Prakash Behera & Arti Sahu]
[This article was first published on Kings Student Law Review (KSLR)'s Commercial & Financial Law Blog, London. The copyright to this article is vested with KSLR and is being republished on this blog without any intention to infringe the copyright owned by KSLR]
Recently, the Department of Industrial Policy and Promotion (DIPP) issued Press Note 2 (Press Note), reforming the rules applicable to Foreign Direct Investment (FDI) in the E-commerce sector in India.[i] Prior to this, trade unions in India had voiced their concerns regarding market practices of the E-commerce marketplaces (Marketplaces) before the Competition Commission of India (CCI), the Indian anti-trust watchdog. This Press Note was issued as a response to these pending concerns, which were only heightened following the CCI’s approval of the merger between Walmart, the largest private employer in the United States of America, and Flipkart, the largest e-commerce company in India.[ii]
Crucially, the Press Note lays down a concise list of obligations that ought to be followed by large international marketplaces such as Flipkart and Amazon when operating in India.[iii] This Press Note gained prominence following the recent CCI decision on the Flipkart-Walmart merger. As part of this decision, the CCI confirmed that the practices carried out by Flipkart (such as deep discounts and preferring traders in its online marketplaces) restrict fair competition. Notwithstanding such findings, the CCI failed to conclusively determine the issue, in order to restrain itself from engaging in a policy decision. This led to reform being introduced by the Indian Government to empower small traders and other trade unions.[iv] This issue has also acquired significance because India is seen to hold much potential for major companies in the world (due to its population of 1.2 billion).[v] This article analyses the Press Note examines its consequences for the e-commerce sector in India and argues that it defies its own supposed objective of creating a ‘level playing field’ in India.
Impact on the E-Commerce Sector
Three changes in the structure of Marketplaces operations were catalysed as a result of the Press Note. First, the Press Note imposed an embargo on such Marketplaces, banning them from selling products of any vendor, if they have a stake or equity participation in the profits.[vi] Second, the Press Note prohibited international Marketplaces from entering exclusive ‘tie-ups’ with sellers, in order to facilitate a fairer playing field for the small vendors.[vii] Third, the Press Note prevents Marketplaces from offering hefty discounts, in order to ensure that their work is conducted in a fair and non-discriminatory manner.[viii]
The Press Note also clarified that FDI is permitted in this sector under the automatic route to 100%, and does not require the consent of the Government of India or Reserve Bank of India beforehand.[ix] This is, however, only applicable to the marketplace model and not the inventory-based model, which was initially also allowed under the earlier rule.[x] Notably, under the earlier regime, the inventory-based model of e-commerce was mainly triggered when the marketplace exercised ownership over the inventory.
The Press Note also tightened regulations by inserting a clause whereby the new rules would apply to inventory-based models on the basis of ‘ownership’ or ‘control’. The requirement of ‘control’ would be met when more than 25% of sales of the vendor are generated from the marketplace entity.[xi] Consequently, failing to meet these requirements would make the marketplace entity ineligible to receive FDI. Moreover, the current regime imposed a new restriction upon the vendor by prohibiting them from selling their products on the marketplace entity's platform, if such marketplace entities do not hold any stakes or have equity participation in the vendor.[xii]
In light of these restrictions, Morgan Stanley recently predicted that Walmart might consider withdrawing from the e-commerce sector in India.[xiii] These concerns are grave and should not be sidelined, especially in the light of Amazon’s retreat from the Chinese market after similar restrictions were imposed by the Chinese Government. Before the embargo was imposed in India, Amazon and Flipkart sold their own line of products such as Amazon Echo, Amazon Basics or Flipkart Smartbuy. Interestingly, Amazon in India entered into a joint venture with N R Narayana Murthy's Catamaran Ventures, in order to form Cloudtail. This joint venture has contributed to a substantial share of sales for Amazon.[xiv]
Generally, marketplace entities adopt such measures to increase profits by lowering supply chain costs. However, Amazon halted these measures following the publication of this Press Note.[xv] This was due to the preceding need to comply with new regulations. Consequently, Amazon’s stake of 49 % in Cloudtail was reduced to 24%.[xvi] In short, these new restrictions have the potential to compel e-commerce players in India to change their operational models.[xvii]
Another significant change is the move to ban exclusive deals for products. The objective of this is to prevent marketplace entities from being in a more favourable position than offline retailers or other players in the market. While flash sales or the exclusive sales of major smartphone brands such as Xiaomi, Oppo, Lenovo or One Plus are unlikely to come about soon,[xviii] this ban may be seen as a commitment to creating equal opportunities for sellers. This move may be able to provide options to the consumers, who have been compelled to prefer one marketplace entity over the other due to the exclusivity factor. In addition, marketplace entities have been obligated to run the marketplace as a ‘level playing field’ by not favouring particular sellers and undertaking transactions on an arm's length basis.[xix] With such provisions in place, one can reasonably expect to see enhanced competition within the marketplace entities operating in India.
On another level, one can observe that through the Press Note’s bid to create a more favourable environment for all the stakeholders, it has permitted group companies of the marketplace entities to act in a fair and non-discriminatory manner in providing cash backs and discounts.[xx] Indeed, the Press Note considered the Income Tax Appellate Tribunal’s decision in Flipkart India Private Limited v. Assistant Commissioner of Income-Tax[xxi], where it was suggested ‘predatory’ pricing by Flipkart and its nexus with certain specific traders ought to be curbed. Interestingly, the CCI had also acknowledged the decision to approve the Walmart-Flipkart merger.[xxii] The mandate has also been extended to other facilities such as warehousing, logistics, advertising etc. Consequently, the hefty cashback and the discounts which used to be an incentivising factor for the consumers could be a thing of the past.[xxiii] These restrictions could help smaller local players in the market to co-exist with the major players and curb predatory pricing. Nevertheless, as the next section shall demonstrate, despite its noble intentions, this Press Note has created numerous grey areas.
Despite its admirable objectives, the Press Note has failed to address some of the basic concerns of trade unions and observers generally. Primarily, the Press Note does not provide any mechanism to assess whether or not 25% of a vendor’s purchases are from itself or its group companies.[xxiv] Similarly, the Press Note is only applicable to e-commerce players with FDI, this excludes domestic marketplace entities such as Snapdeal, Naaptol or PaytmMall.[xxv] Thus, the Press Note’s omission to cover such entities has created a void.
Ironically, the lacunae in the Press Note provides leverage for home-grown entities to operate with relaxed restrictions, despite having mandated strict compliance requirements for entities with FDI.[xxvi] The marketplace entities receiving FDI are then faced with the difficulty of changing to their operational models to comply with the Press Note.[xxvii] Treating companies differently on the basis of national affiliation is unjust deepens injustice and makes India an unviable market for foreign companies.[xxviii] Since India is also a signatory to the General Agreement on Trade in Services (GATT) by requiring adherence to the national treatment principle, the Press Note might have serious ramifications for India.[xxix]
At the same time, the Press Note imposes a restriction on group companies of the marketplace entity to offer cash back and discounts in a fair and non-discriminatory manner.[xxx] However, this could affect consumers who prefer online shopping for how it facilitates access to services and deep discounts. The wording of the Press Note might also lead to the interpretation that such restrictions are applicable to group companies of the marketplace entity, evading the possibility of being applied to the marketplace entity itself. Moreover, the fair and non-discriminatory test (discussed earlier as an effort to curb predatory pricing) can only be made applicable with respect to the other marketplace entities.[xxxi]
Thus far, few (if any) provisions have been made out to determine whether the test is also applicable to offline retailers.[xxxii] This ambiguity incurs more harm than good. The wording, therefore, equips retailers in the offline market with an unfair advantage over e-commerce marketplace entities, especially when they are not required to comply with their existing market practices. Furthermore, the Press Note commits to the principle of non-discrimination while choosing vendors when similar circumstances exist.[xxxiii] For one, how the criterion of ‘similar circumstances’ may be interpreted has not been clarified. This ambiguity grants regulatory bodies the unbridled power to decide what might be considered ‘similar circumstances’ and is undoubtedly unhelpful. In short, despite its bid to appease the small traders and retailers in the market, this Press Note falls short of its aims; it has hardly created a more equitable commercial environment and addressed recent concerns.
Although the efforts of the Department of Industrial Policy and Promotion to usher reform might prove beneficial for the small traders in the long run, the Press Note could affect Foreign Direct Investment in the e-commerce sector. Thus, this piece concludes that despite their intentions, policy makers have failed. This Press Note does not provide a clear or favourable demarcation between the domestic companies and the foreign companies. Indeed, the Press Note contradicts its own stated aims of providing a ‘level playing field’ by creating different levels for the domestic companies and foreign companies co-existing in the same market. Additionally, it is likely that these circumstances would increase concerns relating to competition in the future. If such loopholes are not adequately addressed, soon the retreat of major foreign e-commerce players might be witnessed, as previously predicted by Morgan Stanley.[xxxiv]
[Dibya Prakash Behera, a final year student at the National University of Study and Research in Law, Ranchi is the Founder-Editor of this blog (TCCLR). He is scheduled to join the Funds Formation team at Nishith Desai Associates, Mumbai.]
[Arti Sahu is a 5th Year BA. LLB (Corporate Law Hons.) student at National University of Study and Research in Law, Ranchi.]
[i] Press Note 2, Department of Industrial Policy and Promotion <https://dipp.gov.in/whats-new/press-note-2-2018> accessed on 03 June 2019. [ii] Walmart-Flipkart Combination Registration (2018) SCC OnLine CCI 103. [iii] Press Note 2, Department of Industrial Policy and Promotion <https://dipp.gov.in/whats-new/press-note-2-2018> accessed on 03 June 2019. [iv] ‘Amazon, Flipkart not in violation of norms, says CCI’ The Business Today (New Delhi, 8 November 2018) <https://www.businesstoday.in/top-story/amazon-flipkart-not-in-violation-of-competition-norms-says-cci/story/289039.html> accessed on 10 July 2019. [v] ‘Indian e-commerce market to touch USD 84 billion in 2021: Report’ The Economic Times (New Delhi, 5 February 2019) <https://economictimes.indiatimes.com/industry/services/retail/indian-e-commerce-market-to-touch-usd-84-billion-in-2021-report/articleshow/68169239.cms> accessed on 10 July 2019. [vi] Press Note 2, Department of Industrial Policy and Promotion, paras 188.8.131.52.4; <https://dipp.gov.in/whats-new/press-note-2-2018> accessed on 03 June 2019. [vii] ibid. [viii] ibid. [ix] ibid para 184.108.40.206. [x] Press Note 3 (2016 Series), Department of Industry Policy and Promotion, para 2.2 <https://dipp.gov.in/sites/default/files/pn3_2016_0.pdf> accessed on 10 July 2019. [xi] Press Note 2 n (6) para 5.2.15 2.4 [xii] ibid. [xiii] Nishanth Vasudevan and Samidha Sharma, ‘Morgan Stanley warns Walmart may exit Flipkart post new FDI Rules’ The Economic Times (New Delhi, 5 February 2019) <https://economictimes.indiatimes.com/industry/services/retail/morgan-stanley-warns-walmart-may-exit-flipkart-post-new-fdi-rules/articleshow/67843595.cms> accessed on 15 May 2019. [xiv] Alnoor Peermohamed, ‘Cloudtail reports 27% revenue growth in FY18; crosses $1 bn revenue mark’ The Business Standard (Bengaluru, 15 October 2018) <https://www.businessstandard.com/article/companies/in-a-first-cloudtail-india-posts-1-bn-revenue-reports-27-growth-in-fy18-118101400358_1.html> accessed on 10 July 2019. [xv] Press Note 2, Department of Industrial Policy and Promotion <https://dipp.gov.in/whats-new/press-note-2-2018> accessed on 03 June 2019. [xvi] Shambhavi Anand and Chaitali Chakraborty, ‘Key Amazon seller Cloudtail returns in a new avatar’ The Economic Times (New Delhi, 07 February 2019) <https://economictimes.indiatimes.com/industry/services/retail/key-amazon-seller-cloudtail-returns-in-a-new-avatar/articleshow/67877172.cms> accessed on 03 June 2019. [xvii] Varsha Bansal, ‘India e-commerce norms: Amazon may have to sell Cloudtail, Appario stakes’ Livemint (Bengaluru, 28 December 2018) <https://www.livemint.com/Companies/ydACAnoRhf9dYZCOklb3jN/India-ecommerce-norms-Amazon-may-have-sell-Cloudtail-Appa.html> accessed on 10 July 2019. [xviii] Subhayan Chakraborty and Karan Choudhary, ‘New Govt Norms may end Amazon Flipkart flash sales and discounts’ The Business Standard (New Delhi, 27 December 2018) <https://www.business-standard.com/article/economy-policy/amazon-flipkart-may-feel-the-pinch-after-govt-bars-exclusive-deals-118122600873_1.html> accessed on 03 June 2019. [xix] Press Note 2 n(6). [xx] ibid. [xxi] Flipkart India Private Limited v. Assistant Commissioner of Income-Tax ITA No. 693. Bang/2018 (Asst. Year - 2015-16) <https://taxguru.in/wp-content/uploads/2018/08/Flipkart-India-P-Ltd.-Vs-Asstt.-CIT-ITAT-Bangalore.pdf> accessed on 11 July 2019. [xxii] Walmart-Flipkart Combination Registration (2018) SCC OnLine CCI 103 . [xxiii] ‘Don’t curb online discounts’ The Hindu Business Line (New Delhi, 25 December 2018) <https://www.thehindubusinessline.com/opinion/columns/from-the-viewsroom/dont-curb-online-discounts/article25828202.ece> accessed on 10 July 2019. [xxiv] Press Note 2 n(9). [xxv] ‘E-commerce FDI norms should be applied on domestic players also: CAIT’ The Business Standard (New Delhi, 01 January 2019) <https://www.business-standard.com/article/companies/e-commerce-fdi-norms-should-be-applied-on-domestic-players-also-cait-118123100412_1.html> accessed on 03 June 2019. [xxvi] ‘CAIT says e-commerce FDI rules apply on local online players also; here’s why’ Financial Express (New Delhi, 31 December 2018) <https://www.financialexpress.com/industry/cait-says-e-commerce-fdi-rules-apply-on-local-online-players-also-heres-why/1429611/> accessed 3 June 2019. [xxvii]Shambhavi Anand and Wrtiankar Mukherjee, ‘Amazon plans wholesale makeover to become e-commerce FDI compliant’ The Economic Times (New Delhi, 04 February 2019) <https://economictimes.indiatimes.com/industry/services/retail/amazon-plans-wholesale-makeover-to-become-ecommerce-fdi-compliant/articleshow/67825742.cms> accessed 11 July 2019. [xxviii]Vivan Sharan, ‘Towards an Indian E-commerce Policy’ Live Mint (New Delhi, 26 June 2018) < https://www.livemint.com/Opinion/h4kWtnDCjvPEnRlpSu6T6J/Towards-an-India-ecommerce-policy.html > accessed 1 August 2019. [xxix] ibid. [xxx] Press Note 2 n(6). [xxxi] ibid. [xxxii] ibid. [xxxiii] ibid. [xxxiv] Nishanth Vasudevan and Samidha Sharma, ‘Morgan Stanley warns Walmart may exit Flipkart post new FDI Rules’ The Economic Times (New Delhi, 5 February 2019) <https://economictimes.indiatimes.com/industry/services/retail/morgan-stanley-warns-walmart-may-exit-flipkart-post-new-fdi-rules/articleshow/67843595.cms> accessed 15 May 2019.