This article is written by Shayan Dasgupta while pursuing Certification course in E-commerce and FinTech Laws by LawSikho. Shayan is a Law graduate from Symbiosis Law School, Pune (2016 Batch), having avid experience as in-house counsel as Associate Manager – Legal with Vedanta Limited – Iron Ore Business. Currently practising in High Court of Calcutta with a keen interest in Intellectual Property, Media and Entertainment Laws and E-commerce and FinTech Laws. 

With the recent hullaballoo created over the Walmart-Flipkart deal of $16 billion, the Ministry of Commerce and Industry had set up a task-force, headed by Commerce Secretary Rita Teaotia, which has submitted its recommendations in the form of a Draft National Policy Framework [1] (let’s call it the Policy from hereon) aiming to bring a revolution in the digital economy and e-commerce Industry in India. Whether or not this policy will boost the Digital Economy in India is a statement shrouded in dark clouds across the prudent minds of the key stakeholders of the economy.

The Policy claims to address the central issue of anti-competitive practices followed by the major players of the market in India in order to safeguard the smaller players from unfair trade practices. It further claims to amend and fix the regulatory framework of the e-commerce industry and facilitate digital trade in India. With such robust claims of the policy why is it that the major players are worried about the outcome and the trajectory of this policy? This is primarily because it has suggested that a limited inventory-based B2C (business-to-consumer) model with 49 per cent foreign equity be allowed. I am here to conduct a post-mortem study of this policy and appraise the benefits it so claims.

What is E-commerce?

Ministry of Commerce and Industry has defined E-commerce [2] as the buying and selling of goods and services including digital products over digital and electronic network. There are two models of the e-commerce in India:

1. Market Model: where it is just an online platform connecting buyers and sellers and has no inventory of its own. For example- Naaptol, eBay etc.
2. Inventory Model: here the marketplace owners own the products and also manages the complete end-to-end sales process. The inventory of the goods is owned and sold by the e-commerce entity directly to the customers. For example- Jabong etc.

The erstwhile FDI norms regulating E-commerce

The Commerce ministry had issued a Press note 3 [3] under the Consolidated FDI Policy Circular 2015 in 2016 regulating the FDI norms circumscribing the e-commerce Industry. Major norms are:

1. 100% FDI under automatic route in B2B e-commerce. B. FDI in B2C e-commerce, on the other hand, was not permitted. It was only allowed when:
   • Manufacturer was permitted to sell its products manufactured in India through e-commerce.
   • Single brand brick and mortar entity undertake to sell through e-commerce.
   • Indian manufacturer is permitted to sell its own single-brand products through e-commerce retail which manufactures 70% of its products in-house and sources at most 30% from Indian local markets.
2. FDI in inventory based model e-commerce was strictly prohibited.
3. E-commerce entities were obligated not to permit more 25% of its sales to be affected by one vendor or its group companies.
4. They were prohibited to, directly or indirectly, influence the sale price of goods and to maintain a level playing field.

The Walmart-Flipkart Deal paradox – Reason for the Policy

In May 2018, Walmart, the American retail giant, acquired 77% stake of Flipkart for $ 16 billion [4] making it the biggest M&A transaction in the history of India with the Asia-Pacific Retail Giant. This deal has faced much ire of the small and domestic retailers as they have alleged violations of FDI norms. On several occasions, e-commerce giants such as Amazon and Flipkart have been alleged to create a de- facto inventory model by procuring large sums of goods from their own subsidiaries and group companies thereby violating 25% sales from a single vendor or group companies rule set under the Press Note. Other players include Snapdeal, backed by Japan’s SoftBank, Paytm E-Commerce backed by SoftBank and Alibaba Group, and Tiger Global-backed ShopClues.

Furthermore, the small retailers have already complained several times to the authorities regarding the massively discounted prices offered by these giants which are surreptitiously wiping the small brick and mortar stores from business. To this effect, the Delhi High Court has already issued notices to Amazon and Flipkart [5] based on a PIL filed by the NGO Telecom Watchdog alleging that they have violated FDI norms by finding proxy methods for routing popular products at much cheaper rates through proxy controlled sellers or group companies and pushing out small businesses and brick-and- mortar retailers.

Thus to address the increasing concerns of the smaller players of the market regarding foreign dominance in the Indian market, edging out of smaller retailers or vanishing of brick and mortar stores from business, undue influencing of product pricing and violation of FDI norms, the task force came up with the draft policy.

The Draft Policy Recommendations 2018 [6] – An Analysis

The recommendations of the policy can be broadly categorised as follows:

India first – ‘Make in India’ initiative:

Sale of 100% Indian products

FDI in inventory model of B2C e-commerce entities (which was earlier prohibited by the 2016 FDI norms) may be allowed in limited manner capacity to promote ‘Make in India’ controlled by resident Indian Founder/promoter and up to 49% stake for a single foreign entity as Ultimate Beneficiary owner. [7]  The idea is to promote 100% selling of made in India products through e-commerce retailers.

Domestic funding

To achieve this, the government plans to grant incentives to raise funds domestically. This will be done primarily through incentivizing investment by large companies in start-ups (What are these incentives? This will be a consideration for later deliberations), expanding source funding by Venture Capitalists, listing of start-ups in lucrative bond-markets and amending tax laws to facilitate Angel investment in e-commerce start-ups. This is a much-needed change in the dynamics of investment in this industry. The giants of this industry are heavily backed and funded by foreign players such as Softbank or Alibaba or Amazon etc. There is indeed no dearth of domestic money in India and this needs to be assimilated and appropriately tapped to create a self-sufficient and self-reliant economic environment in India. This will further aid and inspire multiple start-ups to surface and create their mark in the market.

Indian control on the company

Furthermore, changes are being made to Companies Act 2013 to grant more control and power to Indian shareholder despite smaller shareholding. This may be achieved through granting special voting rights or dual-class shares as it happens in the US. This may also draw some ire of the offline companies who would demand similar treatments which needs to be considered by the Government at this drafting stage itself while making changes to the Company Laws.

Despite being a major manufacturing Country, we are being reduced to a consumer status by the flooding of foreign products which are offered to us at throwaway prices in the guise of competition. This initiative will pave the path for our local products to create a brand in international waters. The opening of IKEA or Walmart in India shouldn’t be as impressive as the opening of Indian brand in the US and dominating its market share. We already have given away search- engine market to Google and social media and communication to Facebook and its subsidiaries so it pertinent for Indian entities to establish their presence in global IT market and capitalize on its economies. That should be the objective of Indian start-ups and brands and this is a welcoming step towards it.

Data localization in India

All the players and e-commerce entities collecting, storing and processing data from its customers and operating in India will need to store the data in India only. Plans are set in motion to provide incentives to develop infrastructural advances towards this goal such as direct and indirect tax-benefits and customs duty rebates, and according infrastructure status to data centres and server farms. A sunset period of 2 years will be given to the industry to adjust to this localisation, making this step a mandatory one instead of a mere idea or suggestion.

Data generated by the customers or users in India through social and e-commerce platforms will be subject to this localisation of data storage. Only certain categories of data will not be subject to any restrictions on cross-border data flow. This includes data not collected in India, B2B data sent to India as part of commercial contracts between a business entity located outside India and an Indian entity, among others.

Personal Data Protection Bill

Recently, Justice Sri Krishna Committee has submitted its report and recommendations in the draft Personal Data Protection Bill 2018 [8] to protect the data privacy of Indian users, which is in lines with EU’s General Data Protection Regulation. It upholds the primacy of data protection and will extend to data fiduciaries or data processors who operate outside the country, if they carry out processing of personal data in connection either with any business carried on in India, systematic offering of good and services to data principles in India, or any activity which involves profiling of data principals (individual users) within of India and adds limitations to cross-border transfer of data [9].

This bill provides right of confirmation/consent and access, right to data portability and the right to be forgotten to the data principal, i.e. Indian user. It further highlights personal data and sensitive personal data (SPDI) which are key identifiers of the individual such as race, caste, religion, sexual orientation, sex etc. The bill establishes a Data Protection Authority (DPA), an autonomous authority to oversee the enforcement of the bill having adjudicatory powers.

Harmonious linking of the draft E-commerce policy and Data protection bill:

Subject to this bill read with the draft policy, the government will have access to such data for national security and public policy objectives. There is a clear harmony between the e- commerce policy and the draft data protection bill which is a refreshing change altogether. The bill suggests changes to section 43A of the IT Act as well as Aadhar Act to bring this harmonious construction to life.

In totality, I am in complete support of this initiative. With the threat that was posed after the Cambridge Analytics and Facebook case, protecting the data of Indian users was the need of the hour. The individual’s profile can be used for a variety of commercial purposes, such as precision marketing, targeted advertisements and creditworthiness assessment. Data generated by activity in one area can provide a competitive edge for a new business in another area which not only leads to new revenue streams but can also be sold from one entity to another. Thus, making threats are eminent and ubiquitous and this move is undoubtedly a stride towards a stronger armoured shield against it with IT infrastructural feats and data centres reigning economic development along with advanced Patents and other Intellectual Property accumulation in India. This policy brings leverage to ensure that domestic new players are also able to leverage this strength for economic gains by creating innovative digital products. The entire IT market in India has been a desolate, barren land with no vital Indian players in it, and this will mark the new ethos making us worthy of the so-called IT supremoes as we call ourselves.

Pricing Regulations/Anti-competitive measures

Influencing the price of goods

Targeting massive JVs and M&A ventures in e-commerce (focusing primarily on the much- debated Walmart-Flipkart deal) which raised concerns by the smaller players of the market, the Policy aims at curbing out any direct or indirect influencing of the price of goods and services sold by the e-commerce, especially their group companies through which they procured vast portions of goods and surreptitiously replaced market model with inventory model.

Differential Pricing

To resolve the differential pricing issues such as deep discounts offered by major players, a sunset clause has been introduced which defines a maximum duration for such pricing strategies to attract customers, will be implemented by the e-commerce entities. To me, this clause is overly protective in nature and unwarranted which would eventually deter healthy competition amongst players. To add to this deterrent factor, bulk purchases from related party sellers will be prohibited. This is a major shortcoming as even the brick and mortar entities acquire bulk products on heavy discounts, chop out huge chunks of margins before selling it to the customers. By this logic, even they should be prohibited from doing so and not just the e-commerce players.

Stricter vigilance of Mergers causing price distortions

CCI will be amending the thresholds to potentially detect competition distorting M&A deals, such as the Walmart-Flipkart deal. This goes to show callous and lackadaisical CCI has been in monitoring anti-competitive methods. However, every now then a nudge in the head is what gets the machinery work better, and I guess this was needed by CCI for performing better in future. To aid CCI, a separate wing will be created in ED to handle grievances related to the implementation of FDI norms in Press Note 3.

Consumer Protection

The recommendations under Part 4 of the draft Policy is reiterating the same things which Intermediaries such as e-commerce entities are already following diligently. They inform the customer about the purpose and use of the data collected, show the terms and conditions of use and sale in a simplified and understandable form.

The major change they have introduced is the establishment of the Central Consumer Protection Authority (CCPA) as the nodal agency for inter-governmental coordination, mandatory registration of all e-commerce entities and provide platforms for customer redressal. Introduction of another agency can lead either of the two outcomes- either it will actually smoothen the entire system or it will add to the pull-down nuances of the bureaucratic system.

The task force has also recommended amending Section 79 of the IT Act to modify the liability of intermediaries. Also, the government will have more grounds to seek disclosure of source code of the entities to monitor unfair trade practices and fraudulent methods. This might lead

to higher compliances for the e-commerce entity in order to ensure that they don’t commit any act attracting liability, but in the long run, it would protect the interest of the consumer on online shopping. Eventually, this would lead to an increased dependency on e-commerce which is profitable for the industry.

Payment Regulation

The policy recommends mandatory routing of electronic payments om e-commerce websites through RuPay, which is the Indian solution to Mastercard and Visa. RuPay is the product of NCPI under the Payments and Settlement Systems Act 2007 empowered by RBI and a consortium regional and local banks across the country. E-commerce entities are mandated to list RuPay as an option for payment during its transactions.

Further, to secure the payment transactions strong authentication mechanisms are to be introduced such as biometric information authentication, tokenisation and fraud detection intelligence mechanism for early detection of frauds.

To reiterate my inclination towards Indian companies, I welcome this move. RuPay has been used in the recent past by a few small e-commerce websites and all government websites while conducting transactions and till date, no fallacies have been reported, at least to the best of my knowledge and research thus making it a safe bet for now. Thus, an Indian substitute to compete with Mastercard, Visa and Amex International is indeed a positive way forward for digital self-sufficiency.

Promotion of MSMEs

The policy provides for special e-commerce platforms for MSME’s on PPP model basis with collateral-free funding, P2P funding and crowdsourcing. MSME clusters such as Ludhiana, Aurangabad etc. will be created. Technical capabilities of the MSME’s will also be enhanced to include digital sales and analytics. E-commerce platforms will be incentivised to engage such MSME’s through these measures to reach out to Tier II and III cities and towns and other rural areas. Furthermore, to ease operational hurdles TCS provisions in GST laws will be relooked for the MSME’s.

This will surely promote the logistical sector on a large scale as most e-commerce players are dependent on MSMEs for quality logistical support and order fulfilments. Statistically speaking, e-commerce industry is expected to grow by $200 billion within the next ten years [10] which can only be achieved by tapping the massive sub-urban and rural sectors of India. Promoting MSME industries towards digital growth is going be the bridge between the gaps. This will also help the unorganised industries of art and handicrafts reach far out parts of the world and create a massive Indian brand.

Conclusion

The Indian e-commerce market is populated with foreign presence controlling over the Indian economies which are a deep-seated fault of our own. Despite having the resources and means to achieve the digital excellence we have lagged behind the western giants of this industry against which the very few existing smaller players are struggling to compete with a negligible market share. This policy, even though assumed and declared to be ‘protectionist’ [11] in nature by the top minds of the Industry, aims at a larger objective, i.e. welfare of the Indian industry as a whole. Surely, the policy is ‘unsettling’ for the e-commerce giants as it ties their hands with multiple knots but the policy aims at bringing about a constructive change through causing unsettling disruption to aid the smaller Indian players reach digital self-sufficiency, excellence and create global dominance. The concerns of the well-read and analytical minds should not be about ‘ what is going to happen to the major e-commerce giants?’. The concern should be about, ‘how will the small players reach the level of these giants and dominate the Indian e-commerce market through sale of domestic products and brands?’. Of course, the policy suffers from some grey areas and flawed analogies which ought to be worked on by the government before passing the bill into an assented legislative Act to create a more balanced approach towards e-commerce development in India.

References

1. Electronic Commerce in India: Draft National Policy Framework, https://the-ken.com/wp-
   content/uploads/2018/08/Draft-National-E-commerce-Policy-Annotated.pdf
2. Press Note 3 (2016 Series), DIPP, Ministry of Commerce and Industry, http://dipp.nic.in/sites/default/files/pn3_2016_0.pdf
3. ibid
4. ET Bureau, Economic Times, “Flipkart deal could give listed offline retail firms a lift, too”
   ,economictimes.indiatimes.com/articleshow/64117488.cms utm_source=contentofinterest&utm_medium=text&ut
   m_campaign=cppst, dated May 11, 2018.
5. Sambhavi Anand, Economic Times, “Delhi High Court issues notices to Flipkart and Amazon on FDI violation PIL”,economictimes.indiatimes.com/articleshow/65204374.cms?utm_source=contentofinterest&utm_medium=tex
   t&utm_campaign=cppst , dated July 30, 2018.
6. Ibid [1].
7. Para 2.16 of Draft E-commerce Policy 2018, Ibid.
8. Apoorva Mandhani, LiveLaw, “ Govt. Releases Justice Srikrishna Committee Report And Draft Personal Data Protection Bill, 2018 [Read The Report And Draft Bill]”, https://www.livelaw.in/justice-srikrishna-committee- releases-report-and-personal-data-protection-bill-2018/, dated July 27, 2018. 
9. Siladitya Ray, Medianama, “Justice Srikrishna data protection draft bill is now public, highlights and what happens next” https://www.medianama.com/2018/07/223-sri-krishna-bill-submitted/, dated July 27, 2018.
10. Digital Retail in 2020: rewriting the rules, A Google- A.T. Kearney Study, May 2016, available at: https://www.atkearney.in/documents/4773014/8192273/Digital+Retail+in+2020%E2%80%93Rewriting+the+R ules.pdf/392551c2-7b43-4666-938e-2168a6bd7f6d
11. Pratibha Jain, Partner at Nishith Desai Associates said that the draft was more protectionist rather than being balanced. Source: Sankalp Phartiyal, Aditya Kalra , “India looking to compel e-commerce, social media firms to store data locally”, Nishith Desai Associates, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/Quotes/180731_Q_I, dated July 30 2018.