The government is keen to support the growth of online trade, but its draft e-commerce rules could have the opposite effect. Freny Patel reports

India’s draft e-commerce rules have come under fire from industry experts who warn that, if passed in its current form, could hinder international business relations and impact investment in the country. Furthermore, the rules would not only have serious implications for India’s foreign direct investment (FDI) goals, but could also put unnecessary pressure on trade discussions. Industry representatives have asked for further modifications, with some suggesting the need to delete a few provisions. The draft Consumer Protection (E-commerce) Rules was announced in 2020 and amended on 28 June 2021.

In early September, Consumer Affairs Secretary Leena Nandan had told the media that the government would take a “balanced” approach when it came to finalising the amendments to the rules, aimed at protecting the interest of consumers. The government intended to come out with the best formulations from a consumer perspective, taking into account the wide and varied views received on the draft rules, Nandan had said.

The rules were meant to protect consumers interests, encourage free and fair competition in the market, bring transparency in e-commerce platforms, and further strengthen the regulatory regime. However, in the current form, the draft rules have instead had a tendency to hurt trade relations as they place numerous restrictions and impose compliance obligations on e-commerce players.

While it is difficult to predict the impact on trade between India and other countries, the federal government has received numerous representations and suggestions from governments and trade associations around the world, voicing their concerns that India has gone too far.

Australia was one of the countries that provided input on the proposed draft amendments to the Consumer Protection (E-commerce) Rules, 2020. In its submission on 6 July 2021, its government welcomed India’s efforts to strengthen online consumer protection, which an Australian Department of Foreign Affairs and Trade spokesperson said was “critical for building trust in digital trade”.

However, an Australian government spokesperson tells India Business Law Journal that “it has encouraged India to pursue policy measures that would achieve this outcome without imposing burdensome compliance costs on foreign companies, particularly small and medium enterprises”.

The Australian government had reportedly highlighted in its submission that the draft rules would “impose extensive extraterritorial obligations on foreign e-commerce entities operating in India”. It found the proposed amendments to be “overly prescriptive” and likely to “increase trade barriers”.

Since the rules are currently at the draft stage, “it is too early to say whether they would have any impact on trade or trade relations,” says Stuti Galiya, a Mumbai-based partner in Khaitan & Co’s corporate and commercial practice group.

“The government is in talks with a number of international trade organisations, and the rules could be further amended based on comments received from a number of e-commerce companies and other trade organisations representing countries and international organisations, including the World Trade Organisation,” says Galiya.

“One needs to see how the final rules take shape, and whether the government is able to strike a balance,” she says. “As long as the new rules are aimed at bringing transparency and curb fraudulent business practices, it should be fine … [although] care will also need to be taken to ensure that clarity is provided on issues which are ambiguous today.”

There should not be any “unnecessary curbs” or “increased compliances costs” that may impact small-time players and make it difficult for businesses to operate, Galiya adds.Stuti-Galiya-CoverStory

ALIGN TO INTERNATIONAL PRACTICES

The draft rules may need alignment with international practices to ensure a level playing field, lawyers say, identifying that some of the provisions in the draft e-commerce rules – such as the proposed blanket ban on flash sales – are not in line with international practices of the e-commerce sector, and would be quite burdensome.

Flash sales are peculiar to the e-commerce industry worldwide. “Imposing a complete ban on flash sales could have an overarching impact on the entire industry, especially when the supply chain is not limited to India, but global in nature,” says Galiya.

Other provisions of the draft rules requiring e-commerce players to identify the country of origin of individual products is a peculiarity specific to India alone. From a consumer’s perspective, perhaps there is a need to know where the product originates from, and accordingly make a call. But as Galiya points out, on a practical basis, “e-commerce companies are finding it very difficult to comply with this requirement because a number of countries might be involved in the manufacturing chain”.

It may be difficult to identify the country of origin when raw materials are sourced from one country and the product is assembled in parts across several different countries, and then exported from a third country.

The redressal mechanism, in terms of appointing a grievance officer or a nodal officer, would be an added burden on small e-commerce players. Further, e-commerce entities are also obliged to provide information within 72 hours of receipt of order from an investigative/government agency.

“The timelines are too stringent, and it may practically not be possible to adhere to these timelines,” says Galiya. There is no clarity on the type of information to which such urgency may be attached, she says, adding that a “pragmatic and practical solution-oriented approach needs to be taken, rather than emphasising aggressive compliance”.

Another cause of concern, and for which more clarity is needed, is the wide definition of an “e-commerce entity”, which could be interpreted to mean that, apart from e-commerce companies, other players involved in the supply chain including warehousing and logistics companies could be required to appoint the redressal mechanism in accordance with the draft rules.

Furthermore, many e-commerce companies “will need to evaluate their business and realign the ownership structures in India to ensure that there is no common shareholding,” says Galiya. In accordance with the draft rules – if implemented – e-commerce players would be restricted from selling goods of related parties and associated enterprises on their e-commerce platforms.

As the new rules bar companies from selling products through firms where they have an equity stake, some e-commerce giants – the likes of global major Amazon and its local rival Flipkart – have reworked relationships with some vendors and removed many products from their local websites.

“To reassess and realign the existing structures may be difficult where global companies have a common structure which they implement across various jurisdictions, where they operate,” Galiya says.

The draft rules as they stand do not seem business-friendly, given that they will increase compliance costs and micro-manage at the regulatory level. Lawyers say the government needs to take a more balanced approach and ensure that adequate safeguards are in place.

The draft rules have also received negative feedback from several government departments and ministries, including the Department for Promotion of Industry and Internal Trade, the NITI Aayog, the Ministry of Corporate Affairs, the Ministry of Finance and the Ministry of Electronics and Information Technology.

These various departments not only flagged several anomalies, but also questioned provisions and suggested tweaking the proposed rules.

OVERSTEPPING BOUNDARIES

Due to the cross-cutting nature of e-commerce, many different laws and regulations across sectors govern e-commerce activities in India. Some of these include the Income Tax Act, 1961, Consumer Protection Act, 2019, Information Technology Act, 2000, Foreign Exchange Management Act, 1999, Payment and Settlement Systems, 2007, Companies Act, 2013, and laws related to the Goods and Services Tax.

“The rationale provided by the government for the proposed amendment within a year of notifying the Consumer Protection (E-commerce) Rules, 2020, was not satisfactory,” says Ujjwal Kumar, a Jaipur-based policy analyst at CUTS International, an international research and advocacy group focused on consumer protection issues.Ujjwal-Kumar-CoverStory

The mere receiving of representations from aggrieved consumers, traders and associations complaining against widespread cheating and unfair trade practices being observed in the e-commerce ecosystem are not enough to establish the need for the proposed amendments, says Kumar, adding the present rules failed to deal with alleged cheating and unfair trade practices.

The proposed amendment to the e-commerce rules provides that no e-commerce entity having a dominant position in any market would be allowed to abuse its position. “There is a lack of clarity and certainty regarding the purpose sought to be achieved, and the necessity to introduce such an amendment in the e-commerce rules,” says Nisha Kaur Uberoi, Mumbai-based partner and national head of competition law at Trilegal.

“The abuse of dominant position is already prohibited under section 4 of the Competition Act, 2002, and consequences of contravention by way of penalties have been specified in the Competition Act,” says Uberoi.

She anticipates that the draft rules could raise jurisdictional conflicts regarding adjudication on issues concerning abuse of dominant position. “Section 4 of the Competition Act is applicable to all sectors of the economy and the carve-out for e-commerce dominant entities under the e-commerce rules is wholly unwarranted and unnecessary,” she says.

The proposed amendment is likely to lead to conflicting decisions if issues of abuse of dominant position are adjudicated under both the Competition Act and the Consumer Protection Act, says Uberoi.

Allegations of abuse of dominant position require a comprehensive fact-finding exercise by an investigation agency, which is provided for under the Competition Act. On the other hand, there is no investigation authority established under the Consumer Protection Act and, further, the complainants cannot be expected to conduct a thorough investigation to support and substantiate their complaints, says Uberoi.

She cautions that without the possibility of an investigation or fact-finding exercise by a competent investigation agency, “the possibility of erroneous orders being passed by the authority under the Consumer Protection Act exponentially increases”. This could have a devastating effect on the economy, competition in the market, and on e-commerce entities’ incentive to innovate, she adds.

Many antitrust lawyers fear that the introduction of the amendment under the e-commerce rules could impede the jurisdiction of the Competition Commission of India (CCI) and create confusion and uncertainty for e-commerce entities in the market. “Such an amendment may result in double jeopardy – where the dominant e-commerce entity would be prosecuted and punished under two statutory enactments on the same set of facts and … be punished twice for the same offence,” says Uberoi.

Piyush Goyal, the Minister of Commerce & Industry, Consumer Affairs & Food & Public Distribution and Textiles, previously told the media that, while the interests of consumers has to be protected by the consumer affairs department, the interests of industry and internal trade need to be protected by the commerce ministry.

WHAT’S AT STAKE?

Just as there is a lot at stake for the future of e-commerce companies, there is equally a lot at stake for India, as the e-commerce sector is expected to cross US$111 billion by 2025, from US$46.2 billion in 2020, according to the India Brand Equity Foundation’s (IBEF) August 2021 study. Grocery and fashion/apparel are likely to be the key drivers of incremental growth, the study highlighted. The IBEF is an Indian government export promotion agency established by the Department of Commerce, Ministry of Commerce and Industry.

E-commerce in India has attracted investors from across the world. Indian consultancy firm RedSeer Consulting has even predicted that the Indian e-commerce sector will grow exponentially and become the third-largest market worldwide, dwarfing more mature markets like South Korea and the UK in the next decade. The Indian government is keen to develop and grow the e-commerce industry, but its latest drive to regulate the sector by way of the draft e-commerce rules could end up doing more harm than good. The predicted massive growth could be negatively impacted and, far from encouraging growth and overseas investment, could put the brakes on the growth of the industry.