The way forward is to legitimise Foreign Direct Investment in Indian online retail along with 100 per cent FDI in offline retail without any riders

In 2020, the Department of Consumer Affairs, in the Ministry of Consumer Affairs, Food and Public Distribution issued the Consumer Protection (e-commerce) Rules, under Section 101of the Consumer Protection Act, 2019.The rules require all e-commerce entities that are not established in India, but intending to operate here to register with the Department for Promotion of Industry and Internal Tradein the Commerce Ministry, bar affiliated entities from selling on e-commerce platforms and restricting ‘flash sales’, and disallow seller from using the name or brand associated with that of marketplace e-commerce entity for promotion of goods.

Within a year, the government proposed amendments through the 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 (it makes e-commerce firms liable in case a seller on their platform fails to deliver goods or servicesthat causes loss to the customer).

The amendments are a response to the complaint lodged by the Confederation of All India Traders and other associations regarding violation of the Foreign Direct Investment policy by global e-commerce players, Amazon and Walmart-owned-Flipkart, etc. For close to five years, these bodies havebeen registering protestwiththe concerned authorities,viz., Reserve Bank of India, Enforcement Directorate, Ministry of Commerce and Industriesbesides the judiciary regardingthe ‘unfair’and ‘discriminatory’ treatment meted out to tradersbyforeign majors on their marketplace. These petitions have failed to make an impact. Here are some facts:

In a PIL filed by the Retailers Association of India in early 2018 alleging violation of FDI norms in e-commerce, ED had informed the Delhi High Court on October 31, 2018, that it was investigating violation of the Foreign Exchange Management Act against Amazon, et al but the proceedings are stuck due to the lackadaisical attitude of agencies and the court.

The All-India Online Vendors Association had petitioned the Competition Commission of India alleging abuse of market dominance against Flipkart India Private Limited (it is into wholesale trading/distribution) and e-commerce marketplace Flipkart Internet Private Limited. But, CCI saw nothing wrong in this practice; it wondered ‘how come any one player in the market command any dominant position’.

Even as the National Company Law Appellate Tribunal (NCLAT) quashed the CCI ruling and ordered a probe, nothing is heard on the subject thereafter.

In another complaint filed on January 13, 2020,another traders’ body Delhi VyaparMahasangh alleging anti-competitive behavior by Amazon Seller Services (it operates an e-commerce marketplace) and Flipkart Internet, the CCI had ordered a probe. But the investigation was stayed by the High Court of Karnataka.

As for submissions beforethe Union Government, all that we see is either Union Minister for Commerce and Industry Piyush Goyal reprimanding Amazon chief Jeff Bezos (February, 2020)or the DPIIT (the department under his ministry dealing with FDI) issuing directions to the RBI and ED to take action against the errant e-commerce firms (December, 2020). Now, we have Rules issued bythe DoCA aimed at reining in e-commerce firms (paradoxically, these have been opposed bynone other than DPIIT).

Will these Rules help achieve the objective? Was there anything wrong with the extant Rules?

As per the guidelines issued in early 2016, 100 per cent 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 delivery, accepting payments, etc. No inventory can be held or direct selling undertaken.

Two conditions are prescribed: The entity cannot permit more than 25 per cent of total sales on the marketplace from one vendor or its group companies. Two, it cannot directly or indirectly influence the sale price. Sans any mention as to who the vendor is, a firm linked to marketplace either its subsidiary or a Joint Venturewith an Indian company is eligible. As for the second condition, it is not easy to establish that 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”.

The owner could get around both; first, by having less than 50 per cent shareholding in the seller firm and argue, he or she has no control (albeit majority) over the latter and second, by its wholesale arm restricting supplies to the seller within 25 per cent 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 400,000 sellers on Amazon platform account for 67 per cent 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 platform or restricting transaction between a marketplace firm and the seller or preventing ‘abuse of dominant position’ by e-commerce firms or disallowing seller from using the name or brand associated with that of marketplace entity for promoting sale of their goods, all point towards this overarching goal.

Juxtapose these rules with what is already there in the 2016 guidelines and the clarification issued on December 26, 2018. Both are at cross-purposes. 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 an e-commerce major to be a direct seller - albeit indirectly.This throws up a serious dilemma.

If the ModiGovernment goes ahead with the new rules, it will tantamount to overturning the 2016 and 2018 guidelines. It will be viewed as retrospective change of policy and send a wrong signal to foreign investors. On the other hand,if the existing policy dispensation continues, this will tantamount to the Government backtracking on its commitment to small traders.

Caught between the Devil and the deep sea, so farthe team of Prime Minister Narendra Modi has merely tried to buy time in the name of wider consultations. But a decision can’t be deferred indefinitely.

The way forward is tolegitimize FDI in Indian online retail. Modi should also allow 100 per cent FDI in offline retail without any riders (at present, 51 per cent 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 one another on equal terms. It will be a win-win for all stakeholders including the Government which will be spared the rigmarole of having to regulate the sector.

(The writer is a policy analyst. The views expressed are personal.)