This article is written by Anwesh Patnaik.
The burgeoning e-commerce market in India had made the industry very attractive for investment purposes. A significant portion of the new-age technology companies in India were e-commerce entities. Until recently, the policies formulated by different governmental departments and ministries including the permission of 100% FDI for B2B e-commerce had fuelled the growth of these entities in the country. Moreover, the absence of specific legislation governing these marketplaces made an investment in these entities an attractive proposition. Consequently, the market-centric approach resulted in consumer dissatisfaction and an increase in the demand for regulations. The amended Consumer Protection Act, 2019 included e-commerce within its ambit. Further, the E-Commerce Rules, 2020 were formulated with the objective to provide a specific legislative framework exclusively governing e-commerce activities. However, these guidelines and regulations were deemed insufficient as they did not take into consideration certain market practices exclusive to the e-commerce entities.
The Ministry of Consumer Affairs (MCA) published the amended draft of the E-Commerce Rules, 2021. The new rules seek to introduce a more stringent framework for the operation of E-Commerce entities in the country and substantially increase the compliance obligations of the entities. These amendments are in response to the persistent and vehement campaigning by the trader association against the practices of the e-commerce platforms. Indisputably, the rules are intended to target the dominating e-commerce platforms such as Amazon or Flipkart, however, other marketplace entities shall also be impacted with a hardened regulatory architecture.
The purpose of this article is to elucidate the proposed changes introduced in the draft and their potential impact on the E-Commerce entities. This article adopts a structured approach while analysing the new draft and the author clubs the related provisions together for a better understanding of the provisions enumerated within the draft.
The draft rules do not per se amend the existing provisions of the E-Commerce Rules, 2020 but it does envision new provisions within the ambit of the existing framework that substantially alters the structure within which the e-commerce entities operated. The proposed changes as contemplated within the draft have been enlisted in the following paragraphs.
Registration and Ambit
The foremost requirement is that any e-commerce entity seeking to operate within the Indian territory shall have to mandatorily obtain a registration number from the Department of Promotion of Industries and Internal Trade (DPIIT). The platform shall have to prominently display the registration number along with the invoice number for every order to the consumer on its platform.
The draft has widened the ambit of ‘e-commerce entity’ as defined in the Rules. As per the altered definition, an e-commerce entity also includes such entities that are engaged by the platforms or the person for the purpose of fulfillment of the orders and ‘other related parties as defined under Section 2(76) of the Companies Act, 2013. The implication is that even the delivery, logistics, and payment partners being engaged by the platforms could be considered a part of the e-commerce platform.
Perhaps even more significant is the inclusion of the ‘other related parties within the ambit of the e-commerce entity. A related party in reference to a company includes the director, key managerial personnel, the firm or private company in which the director or the manager is a partner, the publicly listed company wherein the director or the manager holds more than two percent of the paid-up share capital and any body corporate or person that acts in accordance with the advice by the director or the manager. The perusal of the definition as provided in the Companies Act together with the provisions of the draft rules would signify that an e-commerce entity can neither enlist any related party as a seller on the platform nor could it sell any brand being offered by any related party or having any association with the platform. Further, the entity cannot engage any related party for the fulfillment of any activity of the platform provided that the e-commerce entity cannot perform the activity by itself.
Duties of the Entities
A plethora of additional duties have been cast upon the e-commerce entity. The platforms have to mandatorily appoint a resident Chief Compliance Officer responsible for compliance and related third party information, data, or communication link. Along with the Compliance Officer, the platform also has to appoint a resident nodal contact person for coordination with law enforcement agencies as well as a resident Grievance Redressal Officer. Further, the platform has to publish the information and contact details of the Grievance Redressal Officer on its website and mobile application along with the information pertaining to the complaint mechanism. The requirement for the appointment of such officers along with their stated duties is in conformity with the obligations imposed upon the Significant Social Media Intermediaries under the new Information Technology Rules, 2021. The most prominent distinction is that under the IT Rules, the compliance obligations are imposed on platforms with a higher user subscription while under the E-Commerce Rules it has been made applicable to all platforms irrespective of the volume of the trade.
In addition to the aforementioned appointments, the platform also has certain duties while displaying and selling the goods. It cannot permit the display of any misleading advertisement nor can it engage in the sale of goods by deliberate misrepresentation resulting in ‘mis-selling’ of the goods. The rules require the platforms to distinctively identity the sponsored goods. On the occasion that it engages in the trade of imported items, it has to provide the consumers with the details of the importer, the country of origin, a filter mechanism on the website and suggest alternative domestic goods. It shall also be required to provide a ranking of goods that does not discriminate against the domestic sellers. The platform is also required to publish the name of the seller in the invoice using the font size that it uses to display its own name. The entities are prohibited from sharing the data obtained from consumers with any person without the explicit approval of the concerned consumer. The draft rules also provide that consent cannot be automatically recorded using pre-ticked checkboxes.
The proposed rules require the platforms engaging in cross-selling of the goods to provide adequate disclosures to the consumers. The draft defines cross-selling as the display of adjacent, related or complementary goods to purchase by the consumer with the intent to maximise the revenue. The rules also seek to prohibit the entities from organizing flash sales wherein the sales are organized by fraudulently intercepting the ordinary course of business with the intent to only engage the specified sellers managed by the entity to sell goods and services on the platform. A distinction needs to be made between conventional flash sales and the fraudulent flash sales that are prohibited. The former is common in e-commerce platforms and is not per se prohibited by the draft rules. An e-commerce platform can still opt to organize a flash sale of a certain product but it cannot do so in a manner that only permits the specific sellers to sell the products on the platform for the duration of the sale.
Arguably, certain additional duties imposed upon the e-commerce platforms such as the prohibition of misleading advertisements, the mis-selling of goods, sharing of consumer data, and fraudulent flash sales are reasonable. However, many other duties including the appointment of the officers and the rules pertaining to the imported goods merely increase the compliance burden and the cost of operation of these platforms. These duties impose a regulatory burden that limits the maneuvering freedom of the platforms to carry on the business as they deem fit.
The most contentious liability introduced within the proposed framework is perhaps the ‘fallback liability’ of the e-commerce entity in the likely scenario that the seller registered on its platform fails to deliver the goods or the services to the consumers. The marketplace e-commerce entity would subsume the liability and the duties of the seller if the negligent conduct or omission by the latter results in a loss to the consumers. An equally contentious additional liability imposed upon the entities is with respect to the logistic service providers including the transportation, cargo, warehousing, depot, and storage services. A logistics services provider is prohibited from providing differential services to the distinct seller. The service provider is also required to enlist the terms and conditions governing its relationship with the sellers. This provision for liability is in consonance with the expanded definition of an e-commerce entity. Many e-commerce entities have a contractual logistics service provider for the fulfillment of the order, the failure of the service provider to adhere to the aforementioned guidelines would entail the liability befalling on the e-commerce platform. It is pertinent to note that unlike the fall-back liability for the conduct of the sellers, the draft proposal does not provide any explicit liability or duty to be imposed upon the e-commerce entity for the conduct of the logistic service providers. The extent of the liability in such context is thereby unclear.
The e-commerce entity assumes a supervisory authority over the sellers and the logistic service provider. It shall be liable for the conduct of these parties irrespective of the involvement of the entity in such negligent conduct. The bare perusal of the provision indicates a greater compliance burden on the entities. The entity shall be made liable for the negligent conduct of the party over which it does not have any control. If the market clamours are any indication, these provisions shall certainly be subjected to vehement opposition by the entities but it does seem unlikely that the Government may remove these liabilities in the final draft.
Besides the aforementioned contentious liabilities, the proposed rules also impose certain general liabilities. It prohibits the entities from selling goods and to the sellers registered on the platform. The entities are also not permitted to advertise the sellers for the purpose of subsidizing the sale on the platform. It is an omnipresent practice amongst e-commerce entities to advertise certain sellers or products on their platforms. The introduction of the new framework would entail that while the platforms can advertise the sellers or the product on its website or mobile application, it cannot do so to reduce the prices offered to the consumers on the platform. The entity would have to contemplate other forms of consideration for the advertisement.
The Foreseeable Impact on the Platforms
While the ostensible purpose for the introduction of these new rules is to protect the interest of the consumers, some of the provisions would be regarded as perplexing from the perspective of the e-commerce entity. The stringency of the rules becomes apparent by the perusal of the duties and liabilities imposed on the platforms. The tightened regulatory architecture would entail greater difficulty in the operations and compliance fulfillment for the businesses and is likely to have a greater impact on the platforms other than the dominant entities such as Amazon Flipkart. If a greater impact is witnessed on entities other than the dominating platforms, it can be contested that the rules failed in the attainment of their ostensible objective.
The proposed rules establish a skewed regulatory framework for the markets and are tilted against the e-commerce entities. If the proposed framework is implemented on an ‘as is’ basis, a level playing field between the physical stores and online retailers would not exist. It would be ironic for the draft since its professed objective was to establish a level playing field between the physical market and the online retailers. The brick-and-mortar stores are not subjected to any similar regulatory framework that imposes additional liability and supervisory duty over its partners. Moreover, the physical retailers are not subjected to the same disclosure requirements that the e-commerce entities have to mandatorily to the consumers. A baffling distinction is that the physical retailers are not prohibited from displaying, promoting, or selling the brands that have an association with the retailer nor are they required to provide details of the importers, the country of origin, or any sort of ranking and domestic alternatives to the imported goods.
The stringent provisions may adversely affect the operational efficiency and the viability of the e-commerce entities especially at times when the sales of such entities have started increasing post the slump witnessed during the pandemic. Irrefutably, certain provisions are reasonable and indeed were needed to leash the abusive practices of the dominating platforms, but to attain the objective of establishing a fair and level playing field for all marketplace entities, there arises a need to review certain provisions of the new draft.
The perusal of the provisions of the draft rules provided above would indicate that in the foreseeable future, the e-commerce entities shall be subjected to a stringent regulatory architecture giving the entities little room for maneuver and innovation. The absence of a particular threshold for the applicability of the rules signifies that the smaller entities shall be arbitrarily burdened with the additional compliance and regulatory standards, while the dominating platforms may still be able to sustain their operations keeping in view the greater financial and related resources at their disposal. These new provisions signify a reversing trend amongst the concerned government departments with regard to the promotion of e-commerce activities. It seems that the approach favourable towards physical commercial businesses. Undoubtedly, select regulatory provisions are welcome and would certainly aid in ensuring a level playing field but others merely are additional burdens that may not achieve any significant objectives. Further, the timing of the introduction of these rules is questionable. The pandemic and the subsequent lockdown had led to the dip in the sales across businesses and sectors, these rules are being introduced at a time when the sales and business are again gaining momentum. Naturally, the market shall express a pessimistic outlook towards these stringent rules.
While these rules have not been enacted and the ministry has invited suggestions from the stakeholders, the e-commerce entities need to ensure that they are compliant with these provisions since it is unlikely that the government may change its approach altogether.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: