In 2020, the Department of Consumer Affairs (DoCA) in the Ministry of Consumer Affairs, Food and Public Distribution had issued the Consumer Protection (e-commerce) Rules under Section 101 of the Consumer Protection Act, 2019.
The rules lay down the conditions with which e-commerce firms should comply. Amongst others, these bar affiliated entities from selling on e-commerce platforms and restrict ‘flash sales’ (discounts or promotions they offer for a short duration) and disallow the seller from using the name or brand associated with that of the marketplace e-commerce entity for the promotion of goods.
Within a year, the government has proposed certain amendments to these rules in the form of Consumer Protection (e-commerce) (Amendment) Rules, 2021. These amendments include restricting business-to-business, or B2B, sales (business conducted between one business entity and another such as transaction between a marketplace firm and the seller) in e-commerce; a provision to prevent ‘abuse of dominant position’ by e-commerce firms and a fallback liability clause.
The rules are a response to the complaint lodged by the Confederation of All India Traders (CAIT) regarding the violation of the Foreign Direct Investment (FDI) policy by e-commerce players like Amazon and Flipkart. For close to five years, these bodies have been registering protests with the government regarding the ‘unfair’ and ‘discriminatory’ treatment meted out to traders on their marketplace. These have not yielded any results so far.
Will the proposed rules help? Before analysing this, we need to look at the extant rules.
As per the guidelines issued in early 2016 (Press Note 3), 100% FDI is allowed under the marketplace model. The marketplace is a platform where vendors sell their products to consumers even as its owner merely acts as a facilitator by providing services such as booking orders, raising invoices, arranging the delivery, accepting payments etc. She can’t hold inventory and undertake direct selling.
The PN 3 prescribed two conditions: (i) “The entity cannot permit more than 25% of total sales on the marketplace from one vendor or its group companies; (ii) it can’t directly or indirectly influence the sale price. Sans any mention as to “who the vendor is”, a firm linked to the marketplace, either its subsidiary or a Joint Venture (JV) with an Indian company is eligible. As for (ii), it is not easy to establish that the marketplace owner has manipulated the sale price.
Thus, these norms permitted e-commerce majors as direct sellers albeit through their subsidiary/JV. A clarification issued on December 26, 2018, said: “The owner of the marketplace or its subsidiary or its JV with an Indian company can’t have ownership of the seller.” Moreover, “a seller on the platform can’t source more than 25% of its inventory from a firm connected with the latter.”
Restricting supplies
The owner could get around both; first, by having less than 50% shareholding in the seller firm and arguing s/he has no control (albeit majority) over the latter, and second, by its wholesale arm restricting supplies to the seller within the 25% threshold. It is, therefore, not surprising that the e-commerce majors continue to hold sway over the marketplace run by them. For instance, only three dozen firms out of a total of 4,00,000 sellers on Amazon platform account for 67% of sales on it.
Now, look at the proposed rules (2020) and amendments (2021). The thrust of both sets is to establish a ‘disconnect’ between the seller and the marketplace. Whether it is barring affiliated entities from selling on e-commerce platforms or restricting transactions between a marketplace firm and the seller or preventing ‘abuse of dominant position’ by e-commerce firms or disallowing sellers from using the name or brand associated with that of marketplace entity for promoting the sale of their goods, all point towards this overarching goal.
Juxtapose these rules with what is already there in PN 3 (2016) and clarification issued on December 26, 2018. The two work at cross-purpose with each other. While the former wants a total disconnect (the owner of the marketplace or its subsidiary can’t have even 1% shareholding of the seller on the platform; besides, the seller can’t source any supplies from a firm linked to the marketplace), the latter allows e-commerce majors to be a direct seller — albeit indirectly. This throws up a serious dilemma.
If the Narendra Modi government goes ahead with the new rules, this will be tantamount to overturning the PN 3 (2016/2018). It will be viewed as a retrospective change of policy and send a wrong signal to foreign investors. On the other hand, if the existing policy dispensation continues, it will amount to the government backtracking on its commitment to small traders.
The way forward is to legitimise FDI in Indian online retail. Modi should also allow 100% FDI in offline retail — without any riders (at present, 51% FDI is allowed, subject to a host of conditions bordering on prohibition).
This will enable all retailers, online or offline, big or small, to compete with each other on equal terms. It will be a win-win for all stakeholders.
(The writer is a policy analyst)
https://www.deccanherald.com/opinion/in-perspective/delinking-seller-from-marketplace-1081164.html