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India Proposes New Rules To Tighten the Noose on E-Commerce Companies

There are expectations that it will impact the broad e-commerce ecosystem of India, forecasted to be worth over 200 billion U

Overview of the New E-Commerce Provisions:

  • Ban on flash sales
  • The Made-in-India Push
  • Consumer protection: Grievance redressal and Fallback liability
  • Increased compliance requirements

Monday evening, the Government of India banned flash sales on e-commerce platforms and prevented their affiliate companies from being listed as sellers as the country is looking to tighten rules further. The move could certainly hurt Amazon and Walmart-owned Flipkart’s prospects in the world’s second-largest market.

Proposal (1), unveiled by the Indian Ministry of Consumer Affairs on Monday, 21st June 2021, came at a time when conventional retailers in India have incremented their complaints to draw up concerns about what they allege as unfair practices exercised by Flipkart and Amazon as they expand their operations in India.

The Indian Ministry of Consumer Affairs stated, in its proposal, that ecommerce companies should not hold flash sales in the country. On a par with Cyber Monday and Black Friday sales in the United States, these flash sales are very popular during the festive season (September to December) in India. During these flash sales, e-commerce companies have traditionally observed the most significant surges in consumer orders as companies offer heavy discounts on their products.

“Some e-commerce companies are engaging in limiting customer choice by indulging in “flash” or “back to back” sales wherein one seller selling on the platform doesn’t carry any inventory or order fulfillment capacity but merely places a “flash” or “back to back” order with another seller under the control of the platform. It prevents a level playing arena and ultimately limits consumer choices and increases prices,” stated the ministry.

Commonalities with the IT Intermediary Rules

As the government has done with its recent IT rules, it is also proposing that e-commerce platforms designate a chief compliance officer, a nodal contact individual for 24×7 coordination with law enforcement authorities, officers to ensure acquiescence to their orders, and a resident grievance officer to redress the consumers’ grievance on the e-commerce platform.

“It would ensure effective compliance with the Act and Rules provisions and also extend the grievance redressal mechanism on e-commerce platforms,” said the ministry. It further added that the new proposal also seeks every e-commerce company to provide officials and authorities with information within 72 hours “for identity verification or for the detection, prevention, investigation, or prosecution of offenses under any legislature for the time being in force or for cybersecurity events.”

Read Also: Amazon and Flipkart Alleged for Circumventing Indian Regulatory

The New Rule May Force Certain E-commerce Companies To Review Their Business Models

The new rule may also prohibit Flipkart, Amazon, and other e-commerce companies from running their private, in-house labels. The new proposal asks e-commerce companies to ensure that none of their associated and related parties are listed on their marketplaces as sellers for selling D2C offerings. “Make sure that nothing is done by associated enterprises or related parties which the e-commerce company can’t do itself,” said the proposal.

The South Asian market doesn’t allow e-commerce companies to hold inventory or sell goods directly to customers. Companies have operated via a maze of joint ventures with domestic entities that operate as inventory-holding companies to bypass this.

Amazon, which has invested more than 6.5 billion USD in its Indian business, reviewed the proposed policies. In contrast, there has been no comment from Flipkart, whose majority stake Walmart acquired for 16 billion USD in 2018, according to TechCrunch (2).

In a court hearing earlier this week, a Flipkart lawyer stated that the company sees nothing wrong in cutting fees for sellers on its platform if they lower product prices.

The ministry stated that it is proposing, for which it is looking to seek industry feedback over the upcoming 15 days, after getting “multiple complaints against widespread unfair and cheating trade practices observed in the e-commerce ecosystem.”

Moreover, the new proposal asks e-commerce companies to roll out a mechanism to find products on their marketplaces based on their country of origin and offer alternatives to “ensure a fair opportunity to local players.”

The announcements came when Flipkart is in talks to secure 3 billion USD and explore the initial public offering. Both Flipkart and Amazon are also a subject of an ongoing antitrust probe in India.

It is the second major amendment the Government of India has proposed in recent years. In 2018, the center had proposed stringent rules for e-commerce companies that, when implemented in early 2019, left Flipkart and Amazon scrambling to delist hundreds of thousands of products from their platforms and made their investments in associated companies way more indirect (3).

Today’s proposal comes months after Reuters’s report (4), referring company documents that Amazon had given the favored treatment to a small sellers group in the country, candidly misrepresented its associations with those sellers and used them to elude FDI rules in India.

At the time, an influential Indian trader group, the Confederation of All India Traders representing tens of millions of conventional retailers, called the center to ban Amazon in India (5). About the same time, the Indian commerce ministry stated that it is reviewing the matter.

Read Also: The ‘Country of Origin Rule’ and Why it Matters to India?

Changes for E-Commerce Companies

As the new rules come into effect, any digital retailers will first have to register themselves with the DPIIT, Department of Promotion for Industry and Internal Trade.

The rules also propose mandating that no logistics service provider of a marketplace e-commerce company should offer differentiated treatment between sellers under the same category.

Taking from the DPIIT’s FDI policy for e-commerce marketplaces, associated parties and entities related to e-commerce companies can not enlist themselves as sellers on the respective marketplace.

Any company with 10% or more common ultimate beneficial ownership is considered an “associated firm” of an e-commerce company (6).

Impact on Consumers

While the draft rules seek to ban “specific flash sales” by e-commerce companies, it is not banning conventional sales. It is only banning specific back-to-back sales “which limit consumer choice, increase prices, and prevent a level playing arena.”

The rules also mention the concept of “fallback liability,” which states that e-commerce companies will be held liable if a seller on their marketplace fails to deliver a product or service because of negligent conduct, which causes loss to consumers. In multiple cases, when issues emerge with products purchased from their marketplace, e-commerce companies direct customers to the respective sellers to address any grievance. With fallback liability, customers will be able to reach out to the marketplace itself.

The rules also propose restricting e-commerce platforms from “manipulating search results or search indexes,” in what comes as an answer to a long-standing call from traders and sellers to prevent preferential treatment to certain companies.

According to new rules, platforms can also not charge any cancellation fees if a customer chooses to cancel an order after confirming the order (7).

Otherwise, the e-commerce platform should also pay similar charges if they cancel an order unilaterally for any reason as per the new guidelines.

Like e-commerce platforms, sellers can also not refuse to take back products, discontinue services, or refuse refunds if the product is found fake, defective, delivered late, or looks different from the description on the platform.

Moreover, companies can also not bundle up products with pre-ticked checkboxes on certain goods without customers’ consent and need to issue a receipt of customers’ complaints within 48 hours after they raise it.

In a nutshell, shoppers can expect their life to go easier with the new Consumer Protection Rules 2020 for e-commerce. It will give customers a “better-defined” legal power to go to court in disputes, including counterfeit products (8).

Wrapping Up

There are expectations that these new rules will have a broader impact on the Indian e-commerce ecosystem, expected to be worth over 200 billion USD in 2026, with players including from JioMart, BigBasket, Snapdeal, and the market leaders Flipkart and Amazon.

The new Indian e-retailer rules will certainly raise costs for all digital retailers, particularly Flipkart and Amazon, as they may have to review their business models.

They are now the latest in a rising confrontation between the US tech giants and the Government of India over a host of policy-related concerns, which some are alleging as protectionist (9).

The companies have until 6th July to respond to the proposals, after which they may be reviewed further or come into effect.

Non-compliance with the rules, once implemented, could be punishable with prison terms and penalties of at least 25k INR under the Indian consumer law.

Nonetheless, some grey areas need to be addressed in the proposed changes because of the complex operating models big e-commerce players have created, allowing them to circumvent controlled inventory restrictions (10).

Even if the proposed rules come into effect unless there is a clarification on this, the intended level-playing arena will be elusive.