THE PRO-COMPETITIVE EFFECT AND IMPACT OF THE PROPOSED AMENDMENTS TO THE E-COMMERCE RULES
[Devashish Srivastava is a law graduate (B.A.LL.B. Hons) from National Law University Odisha]
India is one of the fastest growing markets for the E-Commerce industry. The revenue from the sector grew drastically from USD 39 billion in 2017 to USD 64 billion in 2020 according to the Competition Commission of India’s (CCI) Market Study on E-Commerce. Federation of Indian Chambers of Commerce and Industry (FICCI) has projected in its report India’s E-Commerce revenue to shoot up to USD 188 billion by 2025. Simultaneously, the E-Commerce industry has been under extensive scrutiny by regulatory authorities in recent times in India as well as other jurisdictions. Therefore, India is no exception to the numerous complications brought upon the retail sector by the huge E-Commerce entities. Through non-compliance and violations of sector specific laws, their actions detrimentally affect the Micro, Small and Medium Enterprises (MSMEs), which are mostly the offline traders and retailers whose business is rapidly being consumed by the E-Commerce market.
Amazon Inc.’s Amazon and Walmart’s Flipkart are the two of the biggest E-Commerce platforms in India and over the course of last 5-6 years, there have been multiple matters brought up against them before the CCI and other regulatory authorities like the Enforcement Directorate (ED). These allegations range from non-compliance of FDI policy under Foreign Exchange Management Act (FEMA) to abusing their market power and entering into anti-competitive arrangements under the Competition Act. In these cases, more often than not, the allegations could not be substantiated with sufficient evidences, resulting in the dismissal of majority of the cases, despite there being reasonable obviousness to the merit of such allegations. The reason for this is often considered to be the lack of expertise and experience in the sector specific adjudicatory and regulatory authorities and the recent inception of certain commercial laws.
However, the approach of CCI, ED and other regulatory authorities and the judicial system has intensified and evolved towards these E-Commerce platforms in recent years. This change in approach was imminent for some time now given the impact of the irregularities in their business on the financial sector of the country and the economy as a whole. The proposed amendments seem to complement different sector specific laws to curtail the irregularities in the E-Commerce industry. Following is an analysis of certain provisions of the proposed amendments to the E-Commerce rules that complement the competition law approach towards the E-Commerce industry. They address certain issues in the E-Commerce industry that are currently being investigated by CCI in an ongoing investigation against the E-Commerce giants – Amazon and Flipkart.
Provisions of Proposed Amendments Complementing the Pro-competitive Approach
The Draft Consumer Protection E-Commerce (Amendment) Rules, 2021 (Draft rules) proposes amendments to the E-Commerce rules that are aimed to tighten the noose on the E-Commerce entities for the violations and exploitation of applicable laws. These proposed rules are inclusive of the several issues and demands raised by offline traders and sellers on E-Commerce platforms before different adjudicating authorities. Over the course of last few years, the sellers on E-Commerce platforms and the offline traders have continuously been engaged in legal matters panning over different areas of 1aw, against major players in the E-Commerce industry.
The proposed amendments can be seen as a part of India’s intensified approach to deal with the complications in the financial sector, caused by the actions of major E-Commerce entities. Following is an understanding of certain specific amendments which are bound to have major implications on the current business model of these E-Commerce entities and the impact they’ll have on the competition approach towards the E-Commerce industry in India.
Definition of ‘E-Commerce entity’: The earlier definition entailed persons who own, operate or manage a facility or platform for electronic commerce. It was amended to encompass even those entities which are engaged by these platforms for the fulfilment of orders that are placed by the users on these platforms and all other ‘related parties’ as defined under section 2(76) of The Companies Act, 2013.
Rule 5(7)(c) of the amendment proposal states that no E-Commerce entity shall discriminate against any seller. Coupled with the FDI rules, these amendments will make it impossible for the E-Commerce entities to give preferential treatment to any seller, which happens to be a major allegation against Amazon and Flipkart, in an ongoing investigation by CCI. This would also keep a check on sellers scheming to get certain preferential treatment and offers from the platforms as they would come under the ambit of E-Commerce entities and would be subjected to similar actions and penalties for violation as an E-Commerce entity.
Prohibition of Flash Sales: Rule 3(e) of the proposed amendments defines flash sales as a sale organized by an E-Commerce entity at significantly reduced prices. The intention is to draw the attention of the consumers to specific goods and services at heavy discounts, and attractive offers and promotions for a predetermined, set time period. Rule 5(16) of these amendments prohibit the E-Commerce entities to conduct flash sales on their platforms.
This is a key aspect of the E-Commerce industry, which has had a huge impact on the businesses of offline traders and retailers, who could not compete with such flash sales owing to their comparatively, inferior market strength. The E-Commerce entities, especially the major players like Amazon, Flipkart, Myntra etc. target the consumers in times of national holidays and festivals, with appealing and attractive flash sales owing to their drastically growing stronghold in the retail market and huge financial backing. This often results in an abuse of dominance by these E-Commerce entities who already are enjoying a substantial market strength. The effects of these flash sales are extremely detrimental to the offline businesses, which are finding it difficult to keep up with these online retailers and are failing miserably.
Preventing Discrimination Against Domestic Goods: Rule 5(7)(b) of the proposed amendments states that the E-Commerce website needs to provide a filter mechanism to identify the origin of the goods at the pre-purchase stage in order to ensure a fair opportunity for domestically produced goods. Rule 5(7)(c) further states that E-Commerce website should provide a ranking mechanism for the goods as well, and further ensure that the ranking criteria does not discriminate against domestic goods and sellers. Any discrimination or preference towards any product hints towards there being anti-competitive agreements in place between the E-Commerce platforms and manufacturers.
Prohibiting Search Manipulation and Promotion of Private Label Brands: The proposed amendments, under Rule 5(14)(c), prohibits manipulation of search results and search indexes in response to a customers’ search queries, either in favour of any particular brand, or in disfavour of any. Rule 5(14)(d) also prohibits the E-Commerce entities from promoting brands which are associated with the E-Commerce entity in a manner which depicts this relation between the brand names and the E-Commerce entity, which often influences the purchase of the consumer in favour of such private label brands.
The proposed amendments being an impactful step by the government to curtail the irregularities in the E-Commerce industry, have received heavy criticism from the industry itself. The provisions of the proposed amendments aim to bring the E-Commerce entities under certain restrictions and prohibitions, which understandably, is opposed by them. Going unchecked and unregulated for their actions and business models for years now, the E-Commerce entities are not used to such a scrutinizing approach that the government has opted for. Invest India, government’s investment promotion and facilitation agency conducted a meeting to take note of the views and comments on the proposed amendments, which was attended by major players in the E-Commerce industry and certain governmental authorities like National Association of Software and Services Companies (NASSCOM) and Confederation of Indian Industry (CII).
Objections were raised by E-Commerce entities like TATA Group and Amazon regarding certain provisions of the proposed amendments considering them to be unfair, and asked for more time to submit their final comment. TATA Group has raised objections especially against the prohibition on private label brands, given its reach and involvement in businesses across industries. The government authorities stated that the criticism of these amendments is a collaborated effort by the E-Commerce entities trying to create a false narrative that the proposed amendments are stringent. It is also claimed that these amendments and will most certainly increase compliance burden on the E-Commerce industry, discouraging FDI in India and consequently hampering India’s image in the global market.
India SME Forum which represents over 86,000 MSMEs has also raised concerns regarding the proposed amendments. They claim that the proposed rules will increase compliance burden including the costs, and would lead to the inaccessibility to the e-commerce industry for the MSME in an industry which is already dominated by a few major players.
Despite all the objections and the false narrative being circulated, the government is not favour of making major changes to the proposed amendments. The government seems inflexible and against accommodating such critically detrimental comments and views, given the long running benefits the proposed amendments are expected to have on the E-Commerce industry.
Irrespective of the criticism received for the proposed amendments, the amendments are necessary to bring about a change in the approach of the government towards the E-Commerce industry. The proposed provisions will help in keeping a more extensive check on the activities of the E-Commerce entities and curtail the irregularities in their business models. The failure to do so has been negatively impacting the offline traders and retailers for almost a decade now. These rules along with establishing new provisions to mandate the E-Commerce industry are also in concurrence with certain provisions and directives of competition regulation in India along with certain other sector specific laws.
The new proposed definition of ‘E-Commerce entity’, encompassing all parties that are engaged by an online platform for the fulfilment of orders, complements CCI’s investigation against Amazon and Flipkart, on the issue of preferential treatment to sellers, as they would now come under the aforesaid definition. Similarly, the proposed amendments address the issue of sale and promotion of private label brands by the E-Commerce platforms which has been raised before the CCI in the ongoing investigation against Amazon and Flipkart, and also in the information filed against Flipkart back in 2018.
These amendments not only complement aspects of competition law but other laws as well. They provide guidelines and directives for regulatory authorities on specific intricacies in the E-Commerce industry such as the FDI norms. The objective of these amendments is to ensure better regulation of the E-Commerce entities, which would make it easier for authorities to keep a check on the irregularities in the E-Commerce industry.
The exploitation of the E-Commerce industry through unethical and irregular activities by the E-Commerce entities has affected the offline retailers and traders, resulting in lakhs of shops going out of business. They are unable to keep up with the business models and the financial strength of these E-Commerce entities. The situation got aggravated last year after a nationwide lockdown was imposed on 25th March due to the ongoing covid pandemic. However, for the E-Commerce industry, this resulted in an unprecedented increase in activity. With restricted movement allowed in portions since the initial lockdown period, the offline traders and retailers suffered a huge downfall in their customer base, which instead, opted for the E-Commerce platforms for their purchasing needs, including their daily essentials.
The business models of these E-Commerce entities have made life easier for the customers, allowing them to purchase almost everything from the comfort of their home, attracting them with heavy discount schemes and promotion campaigns. But it wasn’t long after, when the government realised that these E-Commerce platforms are not just affecting the business of the offline market but also manipulating the customers’ purchase searches, by promoting specific products and brands for their personal gain. A number of agreements and tie-ups have been located by regulatory authorities among many other irregularities in their business.
However, analysing certain actions and steps taken by the Indian government, we get to see that there is a newfound approach of the government to regulate the E-Commerce industry, and to take stringent actions against the E-Commerce entities for the violations and non-compliance of laws. This approach has been adopted by a number of sector specific regulatory authorities in India, aiming to curtail the malpractices in the E-Commerce industry in all aspects. Investigations by CCI and ED, expedited judicial pronouncements, and the proposed amendments to the E-Commerce rules are excellent examples of this new approach adopted by the government to empower the offline traders and retailers, who are desperate, yet unable to take on the business of these huge E-Commerce enterprises by themselves.