Any change in policy will upset foreign investors, while the status quo will hurt small traders
Since Indian retail was opened up to foreign direct investment (FDI) – albeit through the so-called market model in 2016 – foreign giants like Amazon and Walmart-owned Flipkart have been dragged into long legal battles.
In a Public Interest Litigation (PIL) filed in early 2018, the Retailers Association of India (RAI) alleged violation of FDI standards in e-commerce. On October 31, 2018, the Enforcement Directorate (ED) had notified the Delhi High Court (DHC) that it was investigating violation of Foreign Exchange Management Act (Fema) against Amazon, et al, but the procedure is blocked.
In another petition filed before the Competition Commission of India (CCI), the All-India Online Vendors Association (AIOVA) alleged abuse of dominant market position against Flipkart India Private Limited (this is wholesale/distribution) and e-commerce marketplace Flipkart Internet Private Limited. But, CCI saw nothing wrong with this practice; he wondered “how come a market player has a dominant position”.
Even though the National Company Law Appellate Tribunal (NCLAT) overturned the TCC’s decision and ordered an investigation, nothing is heard on the matter afterwards. A most talked about case concerns a complaint filed by trade body Delhi Vyapar Mahasangh (DVM) on January 13, 2020, the ICC alleging anti-competitive behavior by Amazon Seller Services (it operates an e-commerce marketplace) and Internet Flipkart.
DVM argued that Amazon and Flipkart have entered into exclusive sales agreements with smartphone makers to sell certain phones through a small number of preferred sellers. He also alleged that they gave preferential treatment to certain sellers by giving them higher search rankings and offering to pay part of the discount these sellers would offer during key sale periods such as the Big Billion. Flipkart Days and Amazon’s Prime Day.
The CCI accepted DVM’s claim and ordered an investigation. Amazon and Flipkart have approached the Karnataka High Court (KHC) with a plea to overturn the ICC order. The KHC refused to overturn it, prompting the duo to challenge the order in the Supreme Court (SC). In August 2021, the SC denied their claims and ordered that “the Chief Executive of the ICC complete the investigation and submit the findings to the commission who will pass the final orders”.
Meanwhile, in a complaint filed by AIOVA against Amazon Seller Services, the ICC found that “the information contains allegations lacking admissible/required evidence”. In DVM’s case, even if the commission finds anti-competitive behavior by Amazon, it will head into endless litigation.
Did Amazon and others really engage in unfair practices? Did they violate FDI guidelines in e-commerce?
According to guidelines published in early 2016, 100% FDI is allowed under the market model. Marketplace is a platform where sellers sell their products to consumers even while its owner merely acts as a facilitator by providing services such as booking orders, issuing invoices, arranging delivery, accepting payments, managing rejections, etc. make direct sales.
Two conditions are prescribed. First, the entity cannot authorize more than 25% of the total market sales of a supplier or its group companies. Second, it cannot directly or indirectly influence the selling price. Without any mention of the identity of the seller, a company linked to the market, either its subsidiary or a joint venture (JV) with an Indian company is eligible.
As for the second condition, it is not easy to establish that the owner of the marketplace manipulated the selling price.
Thus, contrary to the stated intent of the policy, these standards permitted e-commerce majors as direct sellers, albeit through their subsidiary/JV. No wonder Amazon created a Prione Business Services (PBS) JV, together with an Indian entity owned by Infosys’ Narayan Murthy. PBS, in turn, owns a company Cloudtail India Pvt Ltd which is a “preferred” seller in the Amazon marketplace.
Much has been made of e-commerce giants engaging in anti-competitive behavior; this is also the main complaint of traders. But what often goes unnoticed is that the 2016 guidelines provided for the possibility of a total of four sellers in the marketplace (based on a threshold of 25% of total sales for each seller) all linked to the owner of the platform.
Even though Amazon and others have gone to great lengths to exploit these gaps in the guidelines, the Department of Commerce issued a clarification on December 26, 2018. It stated, “The marketplace owner or its subsidiary or joint venture with a Indian company cannot have ownership of seller.
In addition, “a seller on the platform cannot source more than 25% of their inventory from a company related to the latter”.
The marketplace owner could circumvent both clarifications: first, by owning less than 50% of the selling company’s shares, he can argue that he has no (majority) control over it, and second , its wholesale arm restricting the vendor’s supply within the 25 percent threshold.
The clarification did little to curb the grip of the e-commerce majors on direct sales to consumers to the detriment of small traders. For example, only three dozen companies out of the 400,000 sellers on the Amazon platform account for 67% of sales there.
The government has tried to make corrections to bring the existing dispensation into line with the stated policy intent.
In 2020, the Department of Consumer Affairs (DCA), of the Ministry of Consumer Affairs, Food and Public Distribution, published the Consumer Protection (Electronic Commerce) Rules, under Article 101 of the Consumer Protection Act 2019. The rules prohibit affiliated entities from selling on e-commerce platforms and restrict “flash sales” and prohibit sellers from using the name or trademark associated with that of marketplace e-commerce entities for the promoting products.
Last year, the DCA proposed an amendment to the rules to restrict business-to-business, or B2B, sales (prohibiting transactions between the marketplace owner and seller on its platform) in commerce. e-commerce and a provision to prevent “abuse of dominant position” by e-commerce companies.
The sole purpose of the above changes is to undo the damage (to small traders) caused by the 2016 guidelines. If the government goes ahead with the former, it would be tantamount to reversing the latter. This will be seen as a retrospective policy change and will send the wrong signal to foreign investors.
On the other hand, if the 2016 guidelines remain intact, small traders will continue to face unfair and discriminatory treatment.
We need to understand the genesis of the current situation. The Modi government was keen on getting FDI in retail but did not want to displease small traders. Thus, he brought the foreign majors through the back door under the cover of the market. Result: he is caught “between the deep sea and the devil”.
It can get out of trouble if it goes out of the market and legitimizes 100% FDI in online retail. The government should also allow 100% FDI in offline retail without endorsements (at present, 51% is allowed in this segment subject to onerous endorsements, equivalent to a complete ban). This will allow all retailers, online or offline, large or small, to compete on a level playing field.
It will be a win-win situation for all stakeholders who will also be spared the agony of endless litigation.
The author is a policy analyst (www.uttamgupta.com)