Any tweak in policy will upset foreign investors, while the status quo will hurt small traders

Ever since Indian retail was opened to foreign direct investment (FDI)—albeit through the so-called marketplace model in 2016—foreign giants like Amazon and Walmart-owned-Flipkart have been embroiled in protracted legal battles.

In a public interest litigation (PIL) filed in early 2018, the Retailers Association of India (RAI) had alleged violation of FDI norms in e-commerce. On October 31, 2018, the Enforcement Directorate (ED) had informed the Delhi High Court (DHC) that it was investigating violation of the Foreign Exchange Management Act (Fema) against Amazon, et al, but the proceedings are stuck.

In another petition filed before the Competition Commission of India (CCI), the All-India Online Vendors Association (AIOVA) had alleged 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. A most talked about case relates to a complaint by the trade body Delhi Vyapar Mahasangh (DVM) on January 13, 2020, with the CCI alleging anti-competitive behavior by Amazon Seller Services (it operates an e-commerce marketplace) and Flipkart Internet.

DVM argued that Amazon and Flipkart had entered into exclusive sales agreements with smartphone makers to sell certain phones through a small number of preferred sellers. It also alleged that they had given preferential treatment to certain sellers by giving them higher search rankings, and offering to pay for part of the discount that such sellers would offer during key sales periods such as Flipkart’s Big Billion Days and Amazon’s Prime Day.

The CCI agreed with DVM’s contention and ordered a probe. Amazon and Flipkart approached the Karnataka High Court (KHC) with a plea to quash the CCI order. The KHC refused to quash it, which prompted the duo to challenge the order in the Supreme Court (SC). In August 2021, the SC dismissed their applications and ordered that “the CCI Director General will complete the probe and submit the findings to the commission which will pass final orders.”

Meanwhile, in a complaint filed by AIOVA against Amazon Seller Services, the CCI opined that “the information contains allegations that are devoid of admissible/requisite evidence.” In DVM’s case, even if the commission establishes anti-competitive behavior by Amazon, it will be heading for interminable litigation.

Have Amazon and others really indulged in unfair practices? Have they violated the guidelines on FDI in e-commerce?

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, handling rejections, etc. He can’t hold inventory or undertake direct selling.

Two conditions are prescribed. First, 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. Without 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 the second condition, it is not easy to establish that the marketplace owner has manipulated the sale price.

Thus, contrary to the stated intent of the policy, these norms permitted e-commerce majors as direct sellers, albeit through their subsidiary/JV. No wonder, Amazon established a JV Prione Business Services (PBS), in collaboration with an Indian entity owned by Narayan Murthy of Infosys. PBS in turn, owns a firm Cloudtail India Pvt Ltd which is a “preferred” seller on Amazon’s marketplace.

Much has been said about the e-commerce giants indulging in anti-competitive behavior; indeed this is 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 on the marketplace (based on a threshold of 25 per cent of total sales for each seller) all related to the owner of the platform.

Even as Amazon and others went all out to exploit these loopholes in the guidelines, the Commerce Ministry issued a clarification on December 26, 2018. It 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 per cent of its inventory from a firm connected with the latter.”

The marketplace owner could get around both the clarifications: first, by having less than 50 per cent shareholding in the seller firm, they can argue that they have no control (majority) over the latter, and second by its wholesale arm restricting supplies to the seller within the 25 per cent threshold.

The clarification has done little to rein in the hold of e-commerce majors in direct selling to consumers to the detriment of small traders. For instance, only three dozen firms out of the 400,000 sellers on Amazon platform account for 67 per cent of sales on it.

The government has been trying to make corrections to bring the extant dispensation in line with the stated policy intent.

In 2020, the Department of Consumer Affairs (DCA), 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 bar affiliated entities from selling on e-commerce platforms and restrict ‘flash sales,’ and disallow sellers from using the name or brand associated with that of marketplace e-commerce entities for promotion of goods.

Last year, the DCA came up with an amendment to the rules to restrict business-to-business, or B2B, sales (this is to prohibit transactions between the owner of the marketplace and seller on his platform) in e-commerce and a provision to prevent ‘abuse of dominant position’ by e-commerce firms.

The sole purpose of the above amendments is to undo the damage (to the small traders) caused by 2016 guidelines. If the government goes ahead with the former, it will be tantamount to overturning the latter. It will be viewed as a retrospective change of policy and send a wrong signal to foreign investors.

On the other hand, if the 2016 guidelines stay intact, small traders will continue to face unfair and discriminatory treatment.

We need to understand the genesis behind the present situation. The Modi government was keen to get FDI in retail but didn’t want to displease small traders. So, it brought foreign majors through the backdoor in the garb of the marketplace. The result: it is caught ‘between the deep sea and the devil.’

It can get out of the mess if it dispenses with the marketplace and legitimises 100 per cent FDI in online retail. The government should also allow 100 per cent FDI in offline retail sans riders (at present, 51 per cent is allowed in this segment subject to onerous riders which is tantamount to a complete bar). 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 who will also be spared the agony of endless litigation.

The author is a policy analyst (www.uttamgupta.com)