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Hide and Seek: Foreign Investment in E-Commerce and Indian Regulators

While e-commerce has been prevalent in our country for a while now, its regulation has come about only around the year 2000. The policy on foreign direct investment (FDI Policy) started by defining the types of activities that could be undertaken by e-commerce website which had an element of foreign investment,and has since undergone multiple amendments.A notable amendment was made in the year 2018, and under the extant FDI Policy, equity of 100% is permitted through the automatic route for entities engaged only in the Business to Business (B2B)dealings and not in the Business to Consumer (B2C) dealings. Further, the Policy permits 100% FDI for the marketplace model, but not inventory-based model of e-commerce.

The real regulatory tic-tac-toe that e-commerce behemoths are playing may not be totally apparent to a naïve customer. But, are the regulators like Competition Commission of India, onto something? Let us take Amazon as an example. It is no more a secret that a handful of vendors account for a large proportion of business generated on the website or that Amazon has indirect equity in these vendors, or that these “big vendors” receive competitive advantage on the website in the form of preferentiallistings and deep discount offers. Though these claims have been made by the small retailers, both online and offline, the regulators have somehow been late in catching on to the regulatory maneuverers by these companies.

Amazon’s claims that all its sellers get equal treatment and operate independently on its website. However, some internal documents reported by Reuters debunked these claims and revealed unfair business practices like predatory pricing. Amazon has been offering the big sellers special deals and also control the inventory of these sellers to maneuver demand and supply. But Indian regulators, for a long time, have let these business practices run despite government promises of being small business friendly. What is more pertinent is whether the regulatory framework has something in its armor to actually attack theseunbridled trade practices,which are monopolistic and anti-competitive in nature. When the Competition Commission of India ordered a probe into Amazon under the Competition Act, 2002, Amazon tried to evade the probe on the ground that the Enforcement Directorate was already investigating Amazon under FEMA and its findings were not final yet. However, the Karnataka High Court and subsequently, the Supreme Court, upheld the CCI probe granting them jurisdiction as regulators. This decision of the Apex Court was a welcome move and a departure from its earlier stand in which jurisdiction of CCI was ousted in favour of TRAI (in a Bharti Airtel case). Thus, multiple regulatory agencies have been clashing to investigate and regulate such e-commerce giants. But it seems that these companies have been always one step ahead.

Under Indian law, such e-commerce entities with foreign investment are only supposed to “connect” buyers and sellers and not sell goods directly. However, in 2022, Amazon and Walmart-backed Flipkart did sales of billions of dollars all the while claiming to comply with Indian laws. Such entities have taken Indian rules and interpreted them beneficially by creating brands which they have indirect equity stakes in. For instance, Amazon’s joint venture with Infosys known as Cloudtail has been selling goods in India which is claimed to be one the independent sellers.

However, an average seller remains skeptical of these claims, though ED investigations have not been able to establish any violations on part of Amazon. The regulators in their attempt to protect small businesses and level the playing field put a cap of 25% of the total sales permitted to be made by a single seller. It also prohibited websites from owning the goods sold by them. However, these websites again shifted their policy and transferred ownership to other entities which they call special merchants, which then sell these goods on the same websites. This maneuver brought the share of total sales below the permitted cap of 25%. Though it is interesting that these special merchants account for majority of sales flouting the 25% cap.

These artificial restructurings and corporate maneuvers have allowed e-commerce giants to function even with questionable compliance of FDI Rules. Thus, these websites continue operating on the fringe of regulations with impunity and our regulators have not been able to truly catch up with them. This is essentially what one of these entities called as “testing the boundary of what is allowed by the law”.

In light of the above, the Indian Government has also prepared a draft national e-commerce policy, which is awaiting comments from stakeholders. It talks about how these platforms create entry barriers by data mining but what remains to be seen is how the relevant regulators deal with such issues.




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