E-Commerce In India: Regulatory Framework Update

In order to enhance the capabilities and realize the true potential of the e-commerce sector in India as well as mitigate and address the issues plaguing the sector, the Department Related Parliamentary Standing Committee on Commerce ("Committee") decided to examine the issues related to promotion and regulation of E-commerce in India.

The key challenges and recommendations of the Committee, related to e-commerce in India, have been discussed below.

Registration with (DPIIT)

As per the amendments proposed by Department of Consumer Affairs to the Consumer Protection (E-commerce) Rules, 2020 ("Draft Rules") it was suggested that every e-commerce entity operating in India be required to register itself with the Department for Promotion of Industry and Internal Trade ("DPIIT") and obtain a registration number.

The Committee, concerned that critical data regarding e-commerce has not been collated and maintained by the Government and that e-commerce companies are not registered with the DPIIT, which is the parent department with regards to e-commerce, also recommended that DPIIT make it mandatory for all e-commerce companies to be registered with them and for simplification of the process of registration, in line with the ease of doing business.

FDI Policy

FDI backed e-commerce entities are only permitted to engage in Business to Business (B2B) e-commerce and not in Business to Consumer (B2C) e-commerce.

According to the Consolidated FDI Policy circular of 2020 ("FDI Policy"), 100% foreign direct investment under the automatic route is permitted for marketplace-based model of e-commerce. As per FDI Policy, e-commerce means the buying and selling of goods and services including digital products over digital and electronic network and marketplace model of e-commerce means 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.

It is important to note that the FDI Policy expressly prohibits e-commerce entities from operating as an inventory-based model i.e., an e-commerce activity where inventory of goods and services is owned by the e-commerce entity and is sold to consumers directly. It is also stated that an e-commerce entity providing a marketplace will not exercise ownership or control over the inventory purported to be sold since ownership or control over inventory would render the business an inventory-based model. In this regard inventory of the vendor is deemed to be controlled by an e-commerce platform if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.

According to the FDI Policy, e-commerce entities are required to maintain a level playing field and are not permitted to directly or indirectly influence the sale price of goods or services. Similarly, it mandates for parity between contracts and offers such as cashbacks to be made available to all sellers indiscriminately. Such e-commerce entities are also not allowed to mandate any seller to sell any product exclusively on its platform only.

The Committee, observed that the efficacy of the FDI Policy in promoting fair competition in e-marketplace is limited since it is only applicable to foreign funded e-commerce entities and not to domestically funded e-commerce entities.

The Committee opined that a holistic framework that addresses these issues, irrespective of the marketplace being funded by foreign or domestic entities is the need of the hour and recommended that the DPIIT work out a comprehensive framework that regulates e-commerce.

Obligations Under the Draft Rules

The Draft Rules proposed numerous obligations upon e-commerce entities to make them more transparent and accountable, including appointment of a Chief Compliance Officer (means a managerial personnel or such other senior employee of an e-commerce entity who is a resident and citizen of India), Nodal Contact Person (an employee of an e-commerce entity, other than the Chief Compliance Officer, who is a resident and citizen of India), Resident Grievance Officer (an employee of an e-commerce entity, who is a resident and citizen of India) and the setting up of a Grievance redressal mechanism on the entity's website.

The Committee observed that while the above measures are laudable, blanket imposition of increased obligation on e-commerce companies irrespective of their size, may be counterproductive for the growth of e-commerce in India. The Committee instead recommended to adopt a calibrated approach whereby the additional duties and liabilities proposed to be introduced through the Draft Rules may be made applicable specifically to only e-commerce entities that qualify a certain threshold.

IPR Concerns

It was observed by the Committee that the prevalence of counterfeit products and the absence of protection to the trademark and copyright of products negatively impacts the revenue of genuine manufacturers. Concerned about the unhindered presence of such counterfeit products, the Committee was of the opinion that due diligence measures must be imposed on sellers and platforms to ensure that the products sold on platforms are authentic. The Committee further recommends that the sellers of counterfeit products should be made to pay the loss suffered by genuine rights holder and be barred from the e-commerce space.

Safe Harbor and Fallback Liability

The Draft Rules have introduced a provision that a marketplace e-commerce entity is subject to a fallback liability when a seller registered on its platform fails to deliver the goods or services ordered by a consumer due to negligent conduct, omission or commission of any act by such seller in fulfilling the duties and liabilities, in the manner as prescribed by the marketplace e-commerce entity, which causes loss to the consumer.

This was introduced to prevent consumers from being adversely affected in the event where a seller fails to deliver the required quality of goods or services due to its negligent conduct. Further, the Committee was of the opinion that it would not be beneficial for consumers to totally absolve e-commerce marketplaces of their responsibility maintaining the quality and standards of goods on their platform and recommended that responsibility should be placed on e-commerce marketplaces so that they play an active role in the resolution of issues related to delivery of sub-standard counterfeit products and services on their platforms.

Other Recommendations

Considering the issues related to platform neutrality, deep discounting, non-transparent search rankings, exorbitant commission and coerced bundling of services, demand for exclusivity, the Committee also suggested the following recommendations:

• Clear distinction between the definitions of marketplace and inventory model of e-commerce be delineated:

While the Consumer Protection (E-Commerce) Rules, 2020 ("Rules") carry distinct definitions for both, inventory e-commerce entity and marketplace e-commerce entity, the Committee made the following recommendations for the same:

• In case of a marketplace e-commerce entity, it should not sell any goods owned or controlled by it on such e-commerce marketplace platform. All the sellers on the platform should be third-party sellers.

• In case of an inventory-based e-commerce entity or e-commerce or webstore should own the inventory of goods or services and sell such goods or services owned directly by it to the consumers on a principal-to-principal basis. The e-commerce entity should be the only seller on such e-commerce store platform and there should not be any third-party seller on such e-commerce store platform.

It is imperative to note that while deciding the contours of a marketplace e-commerce entity and inventory-based e-commerce entity and the legal framework and rules applicable to them, the conditionalities that would apply to any such entities for receiving foreign direct investment needs to be considered.

• The Draft Rules propose a provision requiring every marketplace entity to ensure that none of its related parties and associated enterprises are enlisted as sellers for sale to consumers directly. The Committee also echoed this opinion that in order to avoid conflict of interest and ensure that marketplace e-commerce does not indulge in inventory-based model, e-commerce platforms functioning under the marketplace should not be allowed to have any direct or indirect relationship with entities acting as sellers on the platform. Further it was recommended that any e-commerce entity, operating under both marketplace and inventory model must be mandated to use separate branding for each of the platforms.

• The Draft Rules provide that no e-commerce entity shall discriminate between consumers of the same class or make any arbitrary classification of consumers affecting their rights under the Consumer Protection Act, 2019. In line with this provision the Committee was also of the view that arbitrary classification of sellers and buyers and selective application of discounts/ incentives to sellers and buyers should be prohibited on e-commerce platforms. Any incentives/ discounts provided by the platform should be on a non-discriminatory basis.

• The Draft Rules mandate that no e-commerce entity shall make available any information pertaining to the consumer to any person other than the consumer without the express and affirmative consent of such consumer, no such entity shall record such consent automatically, including in the form of pre-ticked boxes. Further, the Committee, perturbed at the absence of a policy and regulatory framework around the use of data, recommended that the personal data protection law be enacted without further delay and further recommends that clear guidelines regarding the use and sharing of data generated on e-commerce platforms are formulated and introduced at the earliest.

• The Committee also recommended that the e-commerce platforms should publish on its website the criteria and main parameters, the weightage assigned to each parameter in determining the ranking of goods and sellers on its platforms. The relative importance of the parameters should also be published in a plain intelligible language. In view of the aforementioned recommendation it is important to note that the Rules already mandate that every marketplace e-commerce entity is required to provide in a clear and accessible manner, displayed prominently to its users at the appropriate place on its platform, an explanation of the main parameters which, individually or collectively, are most significant in determining the ranking of goods or sellers on its platform and the relative importance of those main parameters through an easily and publicly available description drafted in plain and intelligible language.

• The Rules also mention that every marketplace entity is required to include in its terms and conditions generally governing its relationship with sellers on its platform, a description of any differentiated treatment which it gives or might give between goods or services or sellers of the same category. Adding to this, the Committee recommended that marketplaces ought to disclose the complete terms and conditions of agreement that are required to become a seller on the platform including but not limited to platform fee, commission, discounts and relaxations, all types of charges and levies amongst others, applicable to all sellers in a particular category. Unilateral revision of terms and conditions which is to the detriment of any concerned stakeholders must be prohibited.

• The Committee also recommended that all services in the supply chain, including but not limited to, cartable menu, logistics, payment gateway, should be unbundled and the sellers seeking registration on the platform should not be coerced, directly or indirectly, to accept the bundled services. The decision to avail such support services should be left at the discretion of the seller.

• The Committee further recommended that mechanisms for e-commerce players to enable self-regulation and be receptive to feedback and inputs from the ecosystem participants also need to be formulated.

From an examination of the key issues and challenges discussed herein, it may be observed that effective regulation of e-commerce in India is predicated on understanding the e-commerce sector nuances and dynamics and the interests of various stakeholders i.e., the consumers, the sellers, the e-commerce entities (both inventory based and marketplace) as well its intersection with traditional brick and mortar shops and local businesses.