E-Commerce is one of the fastest growing businesses in India with Flipkart, Amazon and Snapdeal being the major players.
These e-commerce companies themselves do not own any inventory but provide an electronic platform connecting the buyers and sellers generally referred to as “market place” model. Having received substantial foreign funding, these companies sell goods at substantially high discounts, on a regular basis.
The brick and mortar retailers have alleged e-commerce companies of resorting to “predatory pricing” tactics and also flouting Foreign Direct Investment (“FDI”) Policy norms in the background that FDI was not allowed in such market-place multi-brand retail formats and that the e-commerce companies were hence exploiting a grey area in the FDI Policy.
Pursuant to the Press Note no. 3 dated March 29, 2016, Department of Industrial Policy and Promotion (“DIPP”) has issued guidelines for FDI in E-commerce sector permitting FDI in companies which adopt market place B2C model, but with two major riders.
An elucidation and brief analysis of the important aspects of said guidelines have been provided hereunder:
Definition of E-Commerce
The term “e-commerce” is defined to mean “buying and selling of goods and services including digital products over digital & electronic network” and the term “digital network” includes “network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc.”
Definition of E-commerce entity
The term is defined to mean a “company” form of structure only. Therefore, a question arises whether a LLP form of structure could undertake e-commerce activity? Models of E-Commerce Inventory Based Model
Inventory based model of e-commerce is defined to mean “an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.”
FDI is not permitted in inventory based model.
Market place based Model
Defined to mean “providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller”.
100% FDI is permitted under the automatic route in market place model, subject to certain conditions.
Important conditions to be complied for doing e-commerce under the Market Place Model
Marketplace e-commerce can enter into transactions with sellers registered on its platform on B2B basis.
E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services.
E-commerce entity providing a marketplace will not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory will render the business into inventory based model.
An e-commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies.
Goods/services made available for sale electronically on website should clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction will be responsibility of the seller.
Payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.
Any warrantee/ guarantee of goods and services sold will be responsibility of the seller.
E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.
Guidelines on cash and carry wholesale trading as given in para 22.214.171.124.2 of the FDI Policy will apply on B2B ecommerce.
ANALYSIS & COMMENTS
The guidelines have both positive and negative aspects in so far as e-commerce (market place based model) companies are concerned. The positive aspect being express recognition of the market place based model of e-commerce and allowance of 100% FDI in it under the automatic route, the flip side being – (i) the entities cannot do more than 25% of the sales from one vendor or their group companies and (ii) the entities cannot directly or indirectly influence the sale price of goods or services and they have to maintain level playing field.
The aforesaid cap of 25% is adverse for e-commerce companies who have major portion of sales made through one vendor who is in a position to offer heavy discounts / competitive rates to these companies and secondly, it prevents the quasi-inventory nature of business model.
There is no exposition in the guidelines on what can or cannot be regarded as “directly or indirectly influencing the sale price” of goods or services and “maintain level playing field”. A question arises whether this condition has to be read and interpreted in the context of provisions of Competition Act, 2002, where the regulator is Competition Commission of India (“CCI”) and not DIPP?
Considering that the Press Note dealS with FDI in e-commerce companies, interestingly, one may take an interpretation that the provisions of restrictions on influencing the sale price and maintaining level playing field may not apply to e-commerce companies having no foreign investment.
Further, “influencing the sale price of products” may not necessarily refer to a situation of discounting only, but it may be hinting at a practice where the “List Price” shown on the e-commerce websites are inflated and set higher than the actual price set by manufactures (i.e. Maximum Retail Price) in order to show that the discounts offered by a particular e-commerce website is higher than others.
While the phrase “maintaining level playing field” seems to be in context to the brick and mortal retailers, one cannot rule out to it being interpreted it vis-à-vis e-commerce companies (i.e. the ecommerce being a separate platform in itself distinct from traditional retailers, where one ecommerce company is required to maintain a level playing field with the other e-commerce companies when it comes to offering discounts). Either ways, for consumers, it restricts choices.
Under the Competition Act, any agreement which causes or is likely to cause an appreciable adverse effect (AAE) on competition in India is deemed anti-competitive. While determining AAE, CCI is inter-alia required to consider (i) accrual of benefits to consumers, (ii) improvements in production or distribution of goods or provision of services and promotion of economic development by means of production or distribution of goods or provision of services. If the e-commerce companies are benefiting the consumers and are considered to be improving the distribution of goods / services and promoting economic development, then the discounting models adopted by market place based ecommerce companies may not be regarded as anti competitive per se. Further, to establish predatory pricing, enjoying of a “dominant position” in a “relevant market” is essential. In the case of Ashish Ahuja v. Snap deal, it was held by CCI that Snap deal was not a dominant player in the e-commerce market and that e-commerce space itself had several competitors and none of whom enjoyed a dominant position.
Following the Press Note, media reports suggest that e-commerce companies may resort to cash back offers on wallets and vouchers instead of up front discounts. Whether these practices come under the purview of “indirectly” affecting the sale price is a question which requires consideration.
Lastly, the condition that the warrantee, guarantee, delivery of goods and “customer satisfaction” is the responsibility of Seller, may have the effect of protecting (substantially) the e-commerce companies from complaints under Consumer Protection Act; but does this save the e-commerce companies in a situation where the genuineness of products is guaranteed by them and the products turn out to be counterfeit?
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Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.