Proposed e-comm rules — Missing the woods for the trees?

Gowree Gokhale | Updated on October 12, 2021

The rules are a hurdle to attracting investments, fostering competition and serving the interests of the consumers

Some of the amendments suggested to the Consumer Protection E-commerce Rules, 2020 issued under the Consumer Protection Act, 2019 (Proposed Amendments) have received severe criticism. One provision drawing flak is the restriction on marketplace e-commerce entities from conducting certain activities in relation to their “related parties” and “associated enterprises”.

Amongst other things, this provision would prohibit marketplaces from listing their “related parties” and “associated enterprises” as sellers on their platforms. These provisions are a hindrance to ‘Make in India’, ‘Start-up India’ and ‘ease of doing business’ initiatives, especially for investments in the SME sector.

In the buzzing start-up system, it is very important that promoters having wide experience can mentor multiple start-ups and contribute to their growth. In this article, we test various scenarios in which this prohibition is likely to impact SMEs and Indian promoters as well as economics of scale for some business models.

Some likely scenarios

An Indian tech company creates a marketplace XYZ. The director of such company also wishes to assist several SME companies to create their online presence and takes a board seat in such companies. If that were to happen, such SMEs will not be able to sell on XYZ.

ABC, a SME selling environment friendly cosmetics is looking to onboard Person X, the founder of a well-established sustainable fashion brand as an independent director for guidance in its business. Person X is also an independent director in several other upcoming SMEs including several e-commerce platforms. ABC will not be able to sell its products on any SME’s platforms where Person X is an independent director.

Promoter AB has partnered with her IIT alumni to create a marketplace ABC with an innovative business model where individuals can check out how new clothing items would suit them by using AR/VR technology. She holds 45 per cent stake in the company that owns the marketplace ABC and also has a board seat. She also has her own private label for Indo-Western clothing, which she started off as a hobby and has become a big brand among millennials. AB will not be able to list her brand on ABC.

A conglomerate has a marketplace entity and an investment entity. The investment entity has invested in several SMEs. Such SMEs potentially being related parties, cannot sell on the marketplace of the group. As a result, SMEs have to choose between investments and marketplace!

Person A’s portfolio of investments includes a variety of businesses including fashion brands, electronics, cosmetics, energy, etc. These companies, although completely unrelated from each other, will have to be mindful of their onward investments in entities including SMEs since the broad ambit could prevent each of such companies including such downstream entities from listing one another as a seller on their platform.

For existing businesses, this prohibition would mean massive overhaul of business models since most businesses manage separate verticals of their business through separate group entities. Listing of products of group entities will be prohibited. For SMEs, this prohibition is likely to be a strategic nightmare and would significantly impact funding plans.

Economies of scale

Let us take an example on economies of scale. Due to the pandemic, a conglomerate of Indian companies has realised the importance of taking their business online. Instead of creating separate inventory-based website for each company, the group creates a single entity to manage website and logistics for the group with the idea that each group company will sell through this website. Such a structure will be prohibited.

It has been reported that this amendment has been proposed to prevent marketplace e-commerce entities from flouting FDI norms. In such a case, the Consumer Protection E-commerce Rules which is a consumer centric legislation is not the place to address that issue, especially when the prohibition does not serve any consumer interests at all. In fact, in some cases it may go against the overall ecosystem and hence against consumer interest.

Plurality of choice ignored

The prohibition completely ignores the reason why marketplaces exist — to make different goods and services available for users on one platform — giving them plurality of choice. This prohibition could result in a complete failure of the marketplace concept as entities will now have to operate two (or more) separate e-commerce platforms to sell third party goods and goods of their related parties/associated enterprises.

It is an accepted principle that laws must be proportionate to the aim pursued by enacting such legislation. The Proposed Amendments seem to ignore this completely. To solve a perceived problem, the law is missing the larger good.

The provisions of the Proposed Amendments are also in conflict with the construct of competition law as there is now an assumption that arrangements between related parties or associated enterprises are anti-competitive/against public interest in nature. This goes against the provisions of competition law in India which provides for a multi-layered investigation process into anti-competitive arrangements.

Much has already been written about other provisions of the Proposed Amendments which are vague and arbitrary. When the focus should be consumer interest and consumer awareness, the Proposed Amendments venture into areas outside the purview of consumer protection. Industry bodies and players have provided their comments to the government on the Proposed Amendments. It remains to be seen how much of the Proposed Amendments make it to the actual legislation.

The writer is E-Commerce Lead, Nishith Desai Associates

Published on October 12, 2021

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