Corporate & Commercial Law

India’s Draft E-Commerce Policy: A Set-Back

The e-commerce industry has been booming over the years and has facilitated the integration of markets across the world. It allows producers as well as buyers to access markets easily which were hitherto separated by time and distance. In India, it brings in a lot of Foreign Direct Investment (“FDI”) as the market-based model for e-commerce entities is allowed 100%  FDI.

In May 2018, Walmart announced its intention to acquire 77% stake in Flipkart, which was approved by the Competition Commission of India (“CCI”) in August 2018, resulting in the biggest acquisition of an e-commerce company around the world. This decision was met with almost equal support and opposition. While small traders and retailers feared the loss of their share in the market, consumers benefited due to the increased competition, leading to a better quality of products, as well as the increased access to international goods. However, recently, there have been speculations that Walmart may exit the e-commerce company, in light of the new FDI policy. The exit of Walmart from the Indian e-commerce market will dissuade other companies from investing in the Indian market.

The Department of Industrial Policy and Promotion (“DIPP”) released the draft national e-commerce policy in February, this year, which sparked immense criticism among e-commerce companies like Amazon and Flipkart. At the outset, it is pertinent to note that the policy and press notes released by DIPP have a force of law in light of the Supreme Court judgement of Ram Jawaya Kapur v. State of Punjab.[1]  The policy was brought in with the intention of helping micro, small and medium enterprises (“MSMEs”) by strictly regulating investments given to e-commerce entities. However, in reality, the use of e-commerce is the means through which small traders and businesses are able to gain access to the global market. The United Nations Conference on Trade And Development report identified that the lack of technical know-how, resources, ability to gain access online are some of the problems that small and medium enterprises face, which in fact can be solved by access to e-commerce entities. Instead of tackling these issues and ensuring the upliftment of small-scale businesses, the government has instead released a policy which inhibits the growth of e-commerce industries. This policy has only created an inhospitable environment which may in turn discourage future inflows into the country.

The FDI policy sets out various undesirable repercussions for both traders and consumers. It is likely to affect the internal market dynamics as well as international relations. Some of the key detrimental effects caused due to this policy are discussed below.

 

[Arundhati Diljit and Rachita Shah are 3rd year BA.LLB (Hons) students at the National Law Institute University, Bhopal]

 

Bar of Exclusive Agreements

As per Press note 2 of 2018, e-commerce entities cannot mandate sellers to sell any product exclusively on their platform. Since the Indian Contract Act, 1872 already renders voidable, all agreements where consent is not free,[2] it can be inferred that the term “mandated” within the policy intends to make every agreement which includes a clause for exclusive sale illegal. The prohibition on exclusive agreements is unnecessary, in light of the fact that the Competition Act, 2002 already regulates such agreements to prevent unfair dominance of one party.[3] Despite the existence of intense competition among e-commerce entities, the new e-commerce policy prohibits exclusive agreements.

The practice before the new FDI policy was that the e-commerce entities agreed to provide services such as delivery, advertising, packaging, warehousing in exchange for the exclusive sale of the seller’s goods on their platform. However, now, since e-commerce companies cannot demand such exclusive sale, they may not provide ancillary services. Moreover, as per Press note 2 of 2018, the e-commerce entities cannot provide rewards, additional services to sellers as they are now compelled to provide the same services in similar circumstances. This eliminates one of the major advantages for small scale traders of selling on an e-commerce platform, where there is a lesser need for capital investment. Small scale traders shall now have to invest in providing these services to consumers. As a result, the increased requirement of capital will lead to a fall of small-scale businesses as well as discourage the growth of potential upcoming small-scale traders.

Additionally, as per Press note 3 of 2016, the e-commerce entity cannot permit more than 25% sales from a single vendor. While this clause was removed from the newer notification, the Government may reinstate it. This policy therefore, increases the requirement of capital as well as does not give small scale traders the option to sell large quantities of their goods on the platform to make up for the increased investment.

 

Scrapping of Discounts and Offers

E-commerce entities are known for attracting consumers by offering discounts. The Competition Act, 2002 prohibits predatory pricing by an enterprise in a dominant position.[4] However, as aforesaid, due to the existence of stiff competition in the e-commerce market, it cannot be said that any of the entities are in a dominant position. Despite not being in contravention of the Act, the government has still decided to curb the discounting policy by not allowing the entities to influence the price in any way. If the offers pass the bar of the competition law, then there seems to be no plausible reason as to why the government should intervene in an industry which is prospering by itself. This will mean that customers will no longer have attractive offers and discounts.

 

Reduction in Variety of Goods Available to Consumers

Amazon and Flipkart were compelled to pull down an array of products from their website around February, 2019, since the policy disallows them to sell products of entities where they hold an equity. On July 8, 2019, the Delhi High Court also passed an interim order against Amazon and Flipkart for providing goods of direct sale entities for sale without conforming to the Direct Selling Guidelines. Prior to this judgement, it was believed that the guidelines were merely indicative in nature. However, the Delhi High Court held that the guidelines had the force of law and were therefore, binding. While this order is justified, it will further decrease the products on sale, leaving lesser choices for consumers.

 

Aggravating the Liquidity Problem

A recent Report by Deloitte had pointed out that Indian e-commerce industries will touch USD 84 billion in 2021 from USD 24 billion due to the expansion of the retail business. However, this forecast would experience a set-back as Indian consumers are now likely to reduce their consumption through e-commerce because of the lack of incentives in the form of discounts and cashbacks. This fall in consumption would also add to a reduction in the amount of FDI which flows into India, considering the reluctance of companies to invest when such rigid rules are being imposed. This would undoubtedly reduce the amount of money which goes into the market, further adding to the liquidity crunch the country has been facing as evidenced through the increased debt defaults and reluctancy of banks to lend. Such an aggravated liquidity problem, would very soon jeopardise the economy.

 

Conclusion

According to many studies, the e-commerce industries help create employment and are expected to provide jobs for more than a million people in India by 2021. Therefore, it becomes imperative to protect the healthy growth of the industry.

The DIPP has consistently stated that the Press note 2 of 2016 is only clarificatory in nature and was aimed at ensuring that e-commerce entities better implement the existing law. While the department is expected to release the comprehensive policy for e-commerce entities in 2020, no change is to be made with respect to FDI within it. The present policy not only restrains the growth of e-commerce entities, but also has an adverse impact on the job opportunities and growth prospects which foreign investment brings in. Above all, the strict regime has added to India’s worsening trade relations with the USA. The policy therefore, will discourage foreign investments in the Indian market as well as destroy the potential growth of the small-scale traders within India.

In light of these issues, the authors propose that the e-commerce policy be revamped while taking into consideration that the competition law already ensures that fair competition is maintained. The changes should include diluting the requirements of non-exclusivity, arm’s length agreements and regulating rather than prohibiting the sale of goods by businesses in which the e-commerce entity holds equity. Discounts may not be permitted above a certain percentage rather than completely eliminating them. The government should help facilitate online access for small scale traders by supporting them with similar resources as available to bigger conglomerates. Therefore, to grow and diversify, it is essential that there is balanced growth of all the players in the economy.

 


Endnotes:

[1] Ram Jawaya Kapur v. State of Punjab, A.I.R. 1955 S.C. 549.

[2] S.10, Indian Contract Act, 1872.

[3] S.3, Competition Act, 2002.

[4] S.4, Competition Act, 2002.


 

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