[ Himanshu Shembekar ]
The author is a 2nd year student of NLU, Odisha
The Department of Industrial Promotion & Policy (DIPP) on 26thDecember, 2018 released a notification revising the policy on the Foreign Direct Investment in e-commerce. The new notification has shocked the big e-retailers like Amazon, Flipkart, etc. This notification has affected the way B2B business activities take place in the e-commerce industry. The new notification has taken effect from 1stFebruary, 2019. Through this post, the author intends to analyze the impact of the new notification of DIPP on the e- commerce industry in India.
Provisions of the notification
The DIPP has retained the policy of allowing 100% FDI in the E-commerce sector but it imposed new conditions on foreign-owned market places. The following are certain new and important set of rules:
- “An e-commerce entity cannot have complete control or exercise over the ownership or the control over the inventory. A vendor’s inventory shall be treated to be controlled by an e-commerce marketplace if more than 25% of its purchases are from the marketplace entity or its related companies.”
- “An entity having equity participation by any e-commerce entity or any of its related company or having control over its inventory by e-commerce market entity or related company, then it shall be not permitted to sell its product on platform run by such marketplace entity.”
- “E-commerce entity providing marketplace will not be allowed to directly or indirectly influence the sale price of goods and services. Provision of any service to any vendor on certain terms which are not available to other vendors in certain circumstances will be deemed to be unfair and discriminatory.”
- “E-commerce marketplace entity shall not mandate any seller to sell any product to sell any product exclusively on its platform only.”
- “The e-commerce companies have to furnish a certificate along with the report of a statutory auditor to the Reserve Bank of India to confirm the compliance of guidelines, by 30thSeptember, every year for the preceding fiscal year.”[i]
Necessity for the changes
These regulations have come up after the complaints which have been made by the small and medium Indian retailers, accusing the giant e-commerce companies for creating unfair marketplace, as these companies keep control over the inventory through affiliates and exclusive agreements.[ii]
In addition to these complaints, the All India Online Vendors Association (AIOVA) had filed a petition to the Competition Commission of India (CCI), accusing that Amazon favored merchants it partially owns such as the Cloudtail and Appario.[iii]
It is a fact that Cloudtail India Pvt Ltd is the biggest retailer of Amazon. Prione Business, which is a joint venture between Amazon Inc. (48% stake) and Infosys co-founder N R Narayana Murthy’s Catamaran Advisors (51% stake), holds 99.99% of the shares of Cloudtail India.[iv] The other retailer is Appario Retail, which is a subsidiary of the Frontizo Business Services. Frontizo Business Services is a joint venture between Amazon India Ltd and Ashok Patni, the co-founder of Patni Computer Systems.Thus, it can be seen that how the big e-commerce companies through their subsidiary companies enter into such agreements which results in their capturing majority of the market share and adversely affecting other businesses.
How new rule has impacted the big E-commerce companies?
It is not surprising that the new regulations have brought all the big rivals in the e-commerce industry like Flipkart and Amazon together to fight against these new regulations which have threatened their business strategies. Due to the new rules, the e-commerce companies can get impacted in the following way-
- The affiliate sellers of the big e-commerce companies have to shift 75% of their business to other retailers, to ensure that affiliate sellers are able to continue with their business activity to provide goods and services.
- The big e-commerce companies have to bring in major changes in their equity structure so as to ensure that they are able to continue business with the sellers.
- As the big e-commerce companies cannot get the benefit of bulk purchases and selling their goods and services at low prices, this shall result in an end of big discount sales.
- The new rules also put an end to the flash sales in which the e- commerce companies can exclusively promote or sell their products on their platform.
- As the e-commerce companies are no longer able to buy majority of inventory through their affiliates, their costs shall increase.
History of cases challenging E-commerce companies
There have been many cases in which e-commerce companies have been accused of practicing non-competitive market practices. Few of the cases are as follows:
In this case, the complainant had accused Snapdeal and SanDisk of colluding with each other. Snapdeal had imposed a condition that to sell SanDisk products through online platform one must be authorized dealers i.e. must be recognized as an authorized dealer by Snapdeal as well as SanDisk, thus violating section 3 and 4 of the Competition Act, 2002 which provide for anti-competitive agreements and abuse of dominant position.[v]
The Commission after enquiry held that the condition that SanDisk products sold through online portals must be bought through authorized dealers is no way an abusive conduct. This decision was within the scope of the company to protect its sanctity of its distributive channel.[vi]It was considered as a normal practice of business.
In this case, the publisher of Chetan Bhagat’s new book ‘Half Girlfriend’, Rupa publication had entered into an exclusive sale agreement with Flipkart, thus granting Flipkart exclusive right to sell the book. It was claimed by the competitors that this led to unfair trade practices as the consumer is given no choice. Flipkart had the 100% market share for the product for which it had exclusive dealing rights, therefore leading to dominance.
In this matter CCI stated that an arrangement between manufacturer and an e-portal did not create any barrier for the new entries. Rather, it stated that with the emergence of the new e- commerce companies, competition is increasing.
In this case, Kaff appliances had announced that it would not honour any warranties on its product which are brought through the online platform, Snapdeal. The main contention on the part of Kaff appliances was that Snapdeal was selling their products at a price below the minimum price determined by them. Also, Kaff had entered into agreement with its authorized dealers that its product won’t be sold at a price less than the minimum price.[vii]Snapdeal in return accused Kaff appliances of limiting the market of distribution, thus violating section 3(3)(a), 3(3)(b) and 3(3)(c) of Competition Act,2002.
Surprisingly in this case, CCI took a completely opposite stand than what it had held in the case of Ashish Ahuja case. It did not consider the practice of Kaff appliances as prudent step to protect its distribution channel or quality. It held that the customers will be adversely affected due to such a policy. Thus, it held that the policy was unilateral and coercive in nature.
The new notification has been criticized by several big e-commerce companies stating that it adversely affects them. If we go through the Competition Act, 2002 we can see the following things:
With regard to Section 19 (3) of the Competition Act, 2002 “the main purpose of the committee is to look into the following factors:
- creation of barriers to new entrants in the market;
- driving existing competitors out of the market;
- foreclosure of competition by hindering entry into the market;
- accrual of benefits to consumers;
- improvements in production or distribution of goods or provision of services;
- promotion of technical, scientific and economic development by means of production
- or distribution of goods or provision of services.”[viii]
If we look into the way, e-commerce companies operate, we can say that their practices are violating the second and third point mentioned above. The commission seems to overlook this aspect. The big e-commerce companies do come together and create big hindrance to the newcomers as well as existing competitors.
Section 3(1) of Competition Act, 2002 states “No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.”[ix]
If we see the current situation big e-commerce companies like Flipkart and Amazon have entered into agreements with their own joint venture companies for the supply of goods and services. Moreover, ventures who act as a supplier are not small businesses but are ventures between big and renowned businesses. The businesses do have a large share in the distribution channel in the market, which results in control of the businesses over the distribution channel as well as supply. This practice is not permissible or is void as it has been explicitly stated in Section 3(2) of this Act.[x] Section 4 of the Competition Act, 2002 deals with the abuse of dominance and monopoly practices. The e-commerce companies are creating a lot of dominance over the market. Section 4(2) of Competition Act, 2002 states “that an enterprise is said to be at a dominant position if (a) directly or indirectly, imposes unfair or discriminatory (ii) price in purchase or sale (including predatory price) of goods or service, (c) indulges in practice or practices resulting in denial of market access.[xi]Further in the explanation part of the section predatory pricing has been defined. It means the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors.”
It is observed that e-commerce companies have been selling the goods at predatory prices. This is practice has been overlooked by the CCI many times. As we observe in the case Snapdeal v Kaff appliances, in which Snapdeal was following the policy of providing goods at predatory prices even though Kaff appliances had explicitly prohibited in its agreements. Predatory pricing results in customers turning towards the vendor selling at lowest price and thus putting off its other competitors. This results in monopoly in the market. Predatory pricing can also be seen in the situation where the e-commerce companies provide huge discounts to its customers, thus selling the goods and services at a price lower than the market price.
Further, these companies enter into agreements with each other to supply goods and services to each other. It is a situation in which these big e-commerce companies are basically trying to help each other out and also progress together. Moreover, these companies are capable of having control over the whole of the market, which results in denying other dealers the access to market. This results in adverse conditions to the small e-commerce companies as well as the retailers to do business in the country.
The preamble of the CCI act states that: “An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto.” But with regard to the e-commerce companies, it is seen that the CCI has been acting against its objective stated in preamble. The retailers as well as small e-commerce companies were suffering a lot due to the neglect by the CCI. The government has taken a big step to save the market from the control of the big e-commerce companies. The new guidelines have brought a huge relief to the retailers and small e-commerce companies. Many of the e-commerce companies were seen to be violating the Section 3 and Section 4 of the CCI act which prohibit certain practices like predatory pricing, exclusive agreements, control over the distribution channels, monopolizing of the business, etc. which were being overlooked by the CCI. The government through this new rule has tried to curb these practices. By restricting the discounts and cashback by big e-retailers, the small businesses can hope to retain their customers. Further the small e- commerce companies who do not have deep pockets to face the big e-commerce companies, will now be benefitted by the new norms. The practice of predatory pricing to attract customers was adversely affecting the profits of e-commerce companies as well as economy of the country. Further, the restriction on the equity and market share has led to major changes in the policies of the related parties or the ally brands who used to get favorable terms for warehousing and logistics. This has given a ray of hope to the small retailers and e-commerce companies of level playing field and fair practice.
[i]Review of policy on Foreign Direct Investment (FDI) in e-commerce, Ministry of Commerce & Industry, 26thDecember 2018, available at http://pib.nic.in/PressReleseDetail.aspx?PRID=1557380(last visited 31.1.2019)
[ii]Aftab Ahmed and Sankalp Phartiyal , India tightens e-commerce rules, likely to hit Amazon, Flipkart ,Reuters ( December 27 ,2018), https://in.reuters.com/article/india-ecommerce/india-tightens-e-commerce-rules-likely-to-hit-amazon-flipkart-idINKCN1OQ09D
[iii]Sanket Vijayasarathy, No more OnePlus exclusive on Amazon, no more Flipkart sale? 5 points you must know about new e-retail rules, India Today ( December 27, 2018), https://www.indiatoday.in/technology/news/story/e-commerce-rules-government-flipkart-amazon-discount-cashback-exclusives-1418234-2018-12-27
[iv]Sandeep Singh, New rules for e-commerce: how they affect marketplace players, buyers,The Indian Express (December 28,2018), https://indianexpress.com/article/explained/new-rules-for-e-commerce-how-they-affect-marketplace-players-buyers-5512553/
[v]E-Commerce and Competition law issues, S.S.Rana& Co., https://www.ssrana.in/Intellectual%20Property/Ecommerce%20Business%20Law/E-commerce-and-Competition-Law-Issues.aspx
[vi]Team legistify, E-Commerce Industry And Competition Law, Legistify, https://www.legistify.com/blogs/view_detail/78-e-commerce-industry-and-competition-law/
[vii]Prashant Prakhar ,Niyati Gandhi ,Payel Chatterjee ,Simone Reis ,M.S. Ananth and Pratibha Jain, Competition Law in India, A Report on Jurisprudential Trends, Nishith Desai Associates ( June, 2015), http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Competition_Law_in_India.pdf