In Pursuit of Inclusivity: Understanding the Draft National E-commerce Policy 2021
The blog explores important additions made by the latest Draft National E-commerce Policy to the regulation of powerful digital platforms. It argues that the policy overcomes the limitations of relying on competition law to remedy abusive behaviour by dominant digital platform since the latter continues to prioritise innovative growth over inclusive growth.
The third and latest draft of the central government’s Draft National E-commerce Policy, that was leaked in March this year, has three expressly stated objectives: innovative growth of the e-commerce sector, consumer welfare and importantly the equitable distribution of gains among all participants. While there are crucial overlaps between the objectives of the draft policy and the competition jurisprudence emerging in India, the former pays much needed attention to inclusive growth that that has so far been relegated by the latter.
The draft policy recognizes the tendency for e-commerce to result in an oligopoly of few powerful actors. To ensure inclusive and localized growth of this sector, the government envisions training and hand-holding measures to bring online those sellers who are offline. Further, digital platforms that follow a marketplace or hybrid mode are prohibited from discriminating amongst sellers, i.e., they are expected to have agnostic relationships with sellers on their platform. In cases where platforms use algorithms, they must ensure that the latter are not biased in favour of or against certain sellers. The anti-discrimination stipulation extends to “associates” and “related parties” of the platform, which will be defined by the government from time to time.
The draft policy is not India’s first attempt at ensuring inclusive growth of e-commerce. Previously, the Foreign Direct Investment (FDI) policy has attempted to impose restrictions in e-commerce sector. These restrictions seek to ensure a level playing field and promotion of domestic entities, in what has increasingly become a winner-takes-all market. Thus, the draft policy should be seen and read as a complement to the FDI policy.
Press Note 2 issued by the Department of Industrial Policy and Promotion (DIPP) in 2018 imposes anti-discriminatory conditions on e-commerce platforms that have received FDI. It states that FDI will not be allowed in inventory based (B2C) e-commerce models. However, 100% FDI is allowed in market-place (B2B) models where ownership over goods and services, and digital platform are different. Press Note 2 introduces new restrictions on marketplace platforms, including the condition that if any marketplace holds equity in a vendor or controls its inventory then the vendor cannot register as a seller on the platform. Further, if more than 25% of the vendor’s inventory is provided by the marketplace or its affiliate, then it would be considered an inventory-based model. For example, if more than 25% of Cloudtail’s inventory was provided by Amazon, it would be considered an inventory based model and would consequently become ineligible for FDI. The policy, additionally, prohibits imposition of discriminatory terms, selective cashbacks, and mandating exclusive sales by vendors on its platform.
Internal documents from Amazon reveal how the company made small adjustments in corporate governance structures in order to evade FDI regulation. The Economic Times (ET) reported that 35% percent of the platform’s revenues in India came from entities in which it had equity - Cloudtail and Appario. The documents evidence preferential deals and special discounts that Amazon had entered into with certain sellers. The company also exercised significant control over inventory of some of its registered sellers. In fact, exclusive deals made with smartphone makers have had a devastating impact on offline retailers. Further, in order to seemingly comply with the then FDI policy, Amazon had shifted some of its sales from Cloudtail to Amazon Wholesale. The latter then sold them to select vendors, who in turn sold them on Amazon marketplace. Regulators, therefore, need to be empowered to react quickly to ensure that e-commerce platforms are not exploiting loopholes in regulations.
Traders’ bodies like Confederation of All India Traders (CAIT) and All India Online Vendors Association (AIOVA) have raised concerns before the Competition Commission of India (CCI) regarding predatory pricing, deep discounting, funding losses and exclusivity of various products on e-commerce platforms. Unfortunately, CCI has not been able to provide the succour that these SMEs need. Compared to the objectives of innovative growth and consumer welfare, competition law jurisprudence in the country has paid little attention to the third objective of the Draft National E-commerce Policy- “that gains from growth are accessible to all participants.”
In its case before the CCI, AIOVA alleged that Flipkart indulged in preferential treatment, as goods were being acquired from sellers by entities owned by Flipkart, such as WS Retail which it later sold on platform at a discount (funded by venture capital). Preferential treatment of a select few vendors and the leveraging of dominance in one market to enter another, was alleged, violated the Competition Act. Disappointingly, the CCI held that dominance was not established by the informant. It observed,
"No doubt, the size and resources of Flipkart are large; yet, it cannot be disputed that the closest competitor to Flipkart is Amazon which has a valuation of around 700 billion dollars and has a global presence. With regards to entry barriers, it has to be noted that it is possible for new entrants to create online marketplace platforms, but the advantage gained by incumbents due to network effects may be difficult to breach. However, Flipkart has pointed out that there are several new players which have entered or propose to enter the e-commerce segment, such as Paytm Mall, thus indicative of low entry barriers."
In its concluding paragraph, the Commission reveals that since the marketplace model is technology-dependent and fast evolving, any intervention must be circumspect of stifling innovation.
Thus, the Draft E-commerce Policy makes a necessary policy intervention that accounts for the failings of competition jurisprudence to deal with dominant platforms. This is in line with global policy interventions, such as the EU's Digital Services Act (DSA) package that seeks to address the anti-competitive behaviour of non-dominant platforms, which competition law has left unaddressed. The package includes the Digital Markets Act that aims to address the gatekeeping role large online platforms occupy by imposing ex-ante obligations.
Representatives of digital platforms have called out the Draft Policy for being anti-business. A particularly contentious point being the discretion given to the government to define “related parties”. It can however be argued that if the state is to respond with agility to the many manoeuvres, large e-commerce companies make to evade domestic regulation, such discretion is necessary. More importantly, through this draft policy the state has moved in the right direction in acknowledging that network effects in combination with a permissive regulatory regime is bound to lead to the creation of few winners (including domestically headquartered ones) and many losers. If the intention is to champion domestic e-commerce actors, including local mom and pop stores, it should be little consolation that some of these winners happen to be domestic entities such as Flipkart, Reliance or Tata if they are allowed to corner the lion's share of the market and profits.