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Amazon and Flipkart Alleged for Circumventing Indian Regulatory

Reliance has alleged Amazon and Flipkart of capital dumping and predatory pricing in an internal document sent to the Assocha

Reliance Industries, owned by India’s richest businessman Mukesh Ambani, has alleged that Walmart-backed Flipkart and Jeff Bezos’s Amazon are using capital dumping to subsidize and engage predatory pricing. It has lead to massive financial distress and unemployment among India’s small merchants and kirana stores.

Dumping relates to a practice wherein a nation exports products at a price lower than the price in the exporter’s domestic market.

According to the Business Standard report, Reliance has alleged Amazon and Flipkart of capital dumping and predatory pricing in an internal document sent to the Assocham, Associated Chambers of Commerce and Industry (1).

The internal document consists of several recommendations and proposed changes dealing with PN2, Press Note 2 of 2018, and Reliance wants Assocham to present it in front of the Indian officials.

According to PN2 2018 (2), an ecommerce entity offering a marketplace would not practice ownership or control over the inventory or goods purported to be sold. It further added that such control or ownership over the inventory would render the business into an inventory-based model.

Notably, it also indicates that officials shall consider that an ecommerce marketplace entity controls a vendor’s inventory if more than 25% of such a vendor’s purchases are from the marketplace firm or its group companies.

As per the report, Reliance has proposed several changes to PN2 2018. It believes that the current definition of ‘group companies’ leaves misinterpretation scope and can be misused by foreign ecommerce companies to circumvent the restrictions conceived in the draft ecommerce policy.

Sellers association and industry experts have alleged that Flipkart and Amazon indulge in preferential treatment for seller companies with whom they have an indirect stake, a prima facie anti-competitive exercise (3).

Amazon Dodging Indian Regulators?

Several parties have alleged in their complaints to the Indian regulatory on Amazon dodging Indian FDI, Foreign Direct investment rules from time to time. There have been many reports covering Amazon India’s anti-competitive practices to increase its market share and its increasing presence over the country’s e-commerce sector, and how it has put brick and mortar retail stores’ livelihoods in peril.

A recent Reuters report substantiated all these claims, and what was perhaps known all along, the report laid bare (4).

Sellers association, the CAIT, Confederation of All India Traders (5) had made several of these claims. It has also called for a ban on Amazon, claiming that the Reuters report’s findings are enough to bar the United State-based ecommerce giant from conducting operations in India.

Notably, the Reuters report came only a few days after Amazon announced that it would manufacture its electronics products such as its FireTV stick in the country. It is also worth highlighting that several top ministers of the Indian government had celebrated the move on Twitter.

Regardless, things seem to be set to get more intricate for Amazon as CAIT has been protesting for years, along with other allied bodies. Even Piyush Goyal, the Union commerce minister, had rebuked Amazon’s investments in the market last year in the face of widespread losses, citing that Amazon is harmful to the country’s job market (6).

The report covered all the details shadowed in Amazon’s about eight-year-long stand in the country since it launched to offer its service to Indian customers in 2013. It includes everything from Amazon giving preferences to seller entities such as Appario and Cloudtail as it indirectly holds a stake in these companies. It also includes how the US-based retail giant is always looking to work around India’s FDI, foreign direct investment, and ecommerce regulations with abject manoeuvers.

Last month, when Reuter released the report on Amazon’s ‘dubious’ progress in India, CAIT immediately called on Goyal, the Union Commerce Minister, to take immediate action on the major and burning issue and order a ban on Amazon’s operations in the country (7).

The secretary-general of CAIT, Praveen Khandelwal, wrote on Twitter (8) that it is an open and shut case that Amazon is willingly playing with the Indian government’s rules and regulations. He further asked officials to stop waiting and call for a ban with an immediate effect.

The Reuters report also talks about Amazon’s preference for these two seller entities, Cloudtail and Appario, as the giant has indirect stakes in these firms.

Notably, Amazon offers them discounted fees and helps them ink collaborations for exclusive sale of products with international brands like Microsoft, Apple, and others. And considering the details the Reuter report revealed, we can say that Amazon has immensely hurt the Indian retailers and merchants’ business prospects.

It is worth noting that even though Amazon can directly engage in the sale of goods to consumers in the United States, it can only act s a facilitator in India where its portal can connect sellers and buyers. Amazon earns a commission from sellers who have listed their products on the Amazon marketplace. In turn, the platform helps these sellers with associated services such as delivering goods to customers and inventory management (9).

The report further highlighted that two sellers in which there are accusations on Amazon for having indirect stakes made up more than 35% of the platform’s revenue via sales in 2019. It indicates how critical these internal sellers are to Amazon’s business in the country.

The report’s finding has been a shot in the arm for several Indian seller’s associations, including CAIT, Confederation of All India Traders, DVM, the Delhi Vyapar Mahasangh, and AIOVA, All India Online Vendors Association.

The CCI, Competition Commission of India, the country’s antitrust regulator (10), has also initiated a probe into the giant’s anti-competitive practices in 2020. Notably, the probe is currently on hold after a challenge by Flipkart, Amazon, and other major ecommerce platforms in India.

India’s Draft E-commerce Policy

The Indian government is in the finishing stages of building its new draft e-commerce policy. And the recent leaks of the draft indicate more trouble for the likes of Flipkart and Amazon.

According to Reuters’s report (11), the draft e-commerce policy would ensure that the country’s retail platforms are equally treating all the sellers and vendors on the platform. These platforms should not use algorithms to give partial treatment to any seller.

According to the report, the new policy had stated that e-commerce operators must ensure equal treatment of all sellers and vendors registered on the platforms and not adopt any algorithms that would lead to prioritizing a select few sellers and vendors.

In the initial draft of the Indian government released in November 2019, FDI in e-commerce would only be granted for the marketplace model. Not for inventory-based selling. It means that Flipkart and Amazon would not be allowed to own or sell through any of their entities (12).

However, there is now an opinion on how these companies could be defined. According to an ET report (13), the government should notify and change these parties’ definitions.

Amazon’s business has already come under speculation for preferential treatment towards companies, Appario and Cloudtail, that it has a stake in. However, the retail giant had last out and called the report unattested, inadequate, and factually inaccurate.

The Indian government has put together a group of secretaries to work on the e-commerce policy and has sent it to several government departments for their opinions. According to the reports, the Department for Promotion of Industry and Internal Trade has also held discussions with several departments from March 17 to 19, 2021, to finalize the policy.

Local players like Paytm Mall, Snapdeal, and more or less found the draft e-commerce policy adequate. However, overseas and other foreign-funded companies like Amazon and Flipkart find it tough to digest.

The inclusion of India’s E-commerce policy

A draft of India’s e-commerce policy was already rolled out in February 2019 and then again in November 2019. Another draft on consumer protection in e-commerce was also rolled out. Prominently, the policy has already observed multiple rounds of deliberations.

Below are general rules laid out in the draft E-commerce policy released in November 2019:

  • It shall be a registered legal company under the laws of the country.
  • It shall submit self-declaration to the department asserting that it complies with all the guidelines.
  • The promoter or key management personnel should not have been condemned of any unlawful offense punishable with imprisonment in the past five years by any competent jurisdiction court.
  • It shall comply with the information technology intermediaries guidelines and provisions rules 2011.
  • The E-Commerce company may facilitate payment for sale in conformity with the RBI, Reserve Bank of India guidelines.

Changes in the New Draft Policies and It’s Meaning for E-commerce Giants

With this new draft policy, Amazon, Flipkart, and other e-commerce marketplaces or hybrid platforms would have to ensure no bias and partiality in their organizations that favor certain sellers.

Apart from clauses about the algorithm, the draft also proposes that these actions prohibited for online marketplaces would also apply to its associates and related parties. It is one way to stop the indirect exercise that Flipkart and Amazon hold in several of its biggest sellers.

DPIIT, the Department for Promotion of Industry and Internal Trade, had released draft policies at an inter-ministerial meeting on Saturday (14).

The e-commerce operator functioning in the market or hybrid mode shall ensure that the platform’s data is not used to get a market advantage against sellers and vendors on its own platform. It highlighted that e-commerce companies should ensure to bring out transparent and clear policies on discounts, including the basis of discounts rate funded by the platform for different sellers and products and implications of participation or no participation in such discount schemes to ensure equal and fair treatment.

The policy document expected to be released for public consultation soon extends the scope of regulation over India’s growing e-commerce sector. According to India’s foreign direct investment rules under Press Note 2, 2018, e-commerce entities are already prohibited from holding direct stakes or controlling the seller’s inventory on its platform.

It covers all modes of e-commerce, such as marketplace inventory and hybrid models, and is equally applicable to entities with domestic and foreign investments, stated the draft. It furthers added that an e-commerce platform hosted by or on behalf of entities having foreign investors shall comply with FDI policies which shall prevail in the case of inconsistencies between the two policies.

The policy further stated that confirmatory assessment procedures would be put in place to verify that goods and services sold on the E-commerce platform meet expected standards and technical regulations as prescribed by sector-specific regulations and rules.

Since several regulations under various ministries govern e-commerce in India, the draft policy informed that a holistic mechanism would be built to prevent anyone from capitalizing on this multi ministry setup and causing delays. It is also worth highlighting that the inter-ministerial complexity on issues governing e-commerce has kept policy on hold for a while.

Apart from these issues, the draft is also looking at data protection mechanisms for e-Commerce users. The Indian government is laying down principles for the use of data for the development of an industry e-commerce consumer protection, economic security, national security, and law enforcement, and put these policies in place as adequate safeguards to prevent access of data by unauthorized persons and misuse, noted the draft.

Even though the new policy is not finalized, there are expectations that it would severely impact Amazon India and Flipkart, and the likes. Multiple regulatory changes have recently hounded these companies.

Apart from e-commerce policies, the market is also expecting changes in the FDI policies, which is also indicated by the e-commerce policy draft.

The Press Note 2, which notified the FDI rules changes in December 2019, cited that foreign e-commerce players are banned from selling products from sellers in which the company has an equity stake. Several e-commerce companies have managed to circumvent these changes by restructuring their holdings in these sellers via subsidiaries and only holding an indirect stake (15).

The new rules, coming into effect soon, is looking to target these structures. Once implemented, the new e-commerce policy would not allow e-commerce companies to even hold an indirect stake in any sellers through its parent. With new rules in place, the changes will likely hurt Amazon the most as the company indirectly holds equity stakes in two of its biggest online sellers in India.

Curbing Predatory Pricing

The new policy also looks at the other major problems in the Indian e-commerce sector, such as deep discounting and predatory pricing. It would also take anti-counterfeiting measures to curb the surging menace of fake products. Another vital point of the new policy is the Indian government’s insistence that all local data should be stored within the country.

The policy also stated that e-commerce players could not directly or indirectly influence the goods or services price, and they must maintain a level of playing field. Moreover, they also cannot falsely be representing themselves as consumers or post reviews on their behalf.

It is worth highlighting that with the launch of the e-commerce platform, JioMart last year, Reliance Inc is a direct competitor of Amazon and Flipkart (16). There are market predictions that the Indian e-commerce industry would grow to 200 billion USD in 2026, from 38.5 billion USD in 2017 (17).

Moreover, the country’s e-commerce opportunity is fairly untapped since only 7% of the total 1.2 trillion USD retail market comprises online sales.

Whats’s Next?

It is the right time for the government to review and amend the competition regime to keep up with the rapidly changing economy. We can also say that despite the competition policy’s universality problems, the Indian officials and regulators have offered enough space to allow the new and creative companies to enter the market and provide more options to the consumers.

At the same, the competition regime should also safeguard traditional bricks-and-mortar retailers’ interests and seek to offer protection from the harmful effects caused by the e-commerce giants.