Allowing FDI in retail would be in the best interest of consumers as this will enable all retailers to compete with one another on equal terms

Following complaints from consumers and traders against “widespread cheating and unfair trade practices” by e-commerce marketplaces such as Amazon and Flipkart, the Union government intends to amend consumer protection rules to bar these firms from (i) selling their private labels on their platforms; (ii) make them liable for frauds committed by a seller; (iii) prohibit them from having their logistics chain for supply-chain management.  

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, handling rejections, etc. He can’t hold inventory or undertake direct selling. As per the guidelines issued in early 2016, the government had allowed 100 per cent FDI under the marketplace model.

Amazon and Flipkart have come under this model and together invested over US$10 billion in setting up supply-chain logistics. They have indulged in a vast array of practices that are detrimental to sellers on their platform as well as to consumers.     

To address their concerns, on July 23, 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 101 of the Consumer Protection Act, 2019. The rules bar affiliated entities from selling on a marketplace, restrict ‘flash sales’ (such sales involve instant, heavily discounted, time-bound sale offers), and disallow sellers from using the name or brand associated with that of marketplace e-commerce entities for the promotion of goods.

On June 21, 2021, 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 government sought stakeholders’ views on these amendments. 

These were not pursued as during intermenstrual consultations, the department for the promotion of industry and internal trade (DPIIT) – nodal authority for dealing with FDI-related issues - expressed concerns that some of the changes in the rules would go beyond consumer protection and impede the flow of foreign investments in the sector. It was also felt this would impact existing investments.

Now, those amendments have been resurrected with some more being added to the list such as prohibiting e-commerce giants from having their logistics chain for supply-chain. 

This time again, the process of giving effect to the amendments is unlikely to be taken to its logical end. Things will simply be allowed to linger on. This is because the government while allowing FDI in the marketplace left some loopholes in the guidelines which keep coming to haunt it whenever it tries to go for a course correction.

In 2016, while permitting FDI in e-commerce, it prescribed two conditions. 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 owned a firm Cloudtail India Pvt Ltd which was a “preferred” seller on Amazon’s marketplace.

In this backdrop, notwithstanding much ado about the foreign giants indulging in anti-competitive behaviour in a host of manifestations such as preferred often related sellers, deep discounts, abuse of dominance and so on, the fact remains that the 2016 guidelines provided for the possibility of a total of four sellers on the e-commerce platform (based on a threshold of 25 per cent of total sales for each seller) who could all be related to the owner of the platform.

Amazon and others were not doing anything wrong in so far as the rule book on FDI was concerned. Meanwhile, on December 26, 2018, the Commerce Ministry issued a clarification saying: “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 (albeit 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 the Amazon platform account for 67 per cent of sales on it.

Apart from pleading with the government, small sellers/traders have also taken the legal course. A most talked about case relates to a complaint by Delhi Vyapar Mahasangh (DVM) on January 13, 2020, with the Competition Commission of India (CCI) alleging anti-competitive behaviour 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.”

Even if the CCI-DG establishes anti-competitive behaviour by Amazon, the matter will be heading for interminable litigation. The issue has to be sorted out by none other than the government itself. It can’t drastically alter the rules (it is intended through 2021 amendments) as it will be tantamount to overturning the 2016 guidelines. It will be viewed as a retrospective change of policy and send a wrong signal to foreign investors. If it continues with the status quo, small traders will continue to face unfair treatment.

The government can get out of the mess if it dispenses with the marketplace and legitimises 100 per cent FDI in online retail. It 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). This will enable all retailers, online or offline, big or small, to compete with one another on equal terms.

(The writer is a policy analyst)