At a conference on law and technology, organized by ASSOCHAM yesterday, Ashish Chandra, General Counsel at Snapdeal spoke fairly openly about the challenges that ecommerce marketplaces are facing in India. Some notes from his talk, some of it paraphrased:
1. Who regulates? “A few months ago, we read that there will be 9 ministries that might regulate e-commerce. The challenge with that is with Internet companies, the business models have to change every three months. Today if telecom operators or DTH companies have to change prices, they have to go to the regulator and get an approval. If 9 ministries have to regulate ecommerce, this industry will die. The government then said that the consumer affairs ministry will regulate. We have 3-4 consumer cases against us every month, and there is a law regarding compensation for those users. Then the government said that the TRAI will regulate. Are they talking about Net Neutrality of Ecommerce?
Then the government said that the Competition Commission of India will regulate ecommerce. How can a watchdog become a regulator? My request is to allow that sector to grow. Why would you overregulate a growing sector? So, what are the regulatory issues?
2. Intermediary Liability: We have a specific mention under the Information Technology Act, which specifically names online marketplaces as a form of intermediary. They are governed more under the safe harbor provision, that if any wrong has been done by a third party, you will not be sent to jail. Only those people who have misused your site have to face the brunt. Unfortunately, the understanding of the law enforcement, and to a large extent, the judicial members, they don’t have the full understanding of these business models. If you post something bad on facebook, they will think that Mark Zuckerberg has to be put in jail. That’s the genesis of ecommerce marketplaces in the IT Act.
3. FDI in Ecommerce:Among the top level issues, the most celebrated issue is that of FDI. I don’t understand why this issue is so burning in government corridors. The FDI policy clearly distinguishes between B2B and B2C ecommerce platforms. They have not put any restriction on putting FDI in ecommerce platforms. What is an ecommerce platform? It is a source code, which allows people to interact. It’s like a telephone exchange, like whatsapp, a skype. Why should FDI be restricted for FDI in ecommerce? Because most people don’t understand this business, they feel that it should be regulated.
4. Taxation: The other issue is taxation, which is Value Added Tax. Here the seller is not the ecommerce company, which is the platform. The seller is an independent seller. But just because the government doesn’t have the machinery or the strength to go after multiple sellers, they want ecommerce companies to pay 8-16% taxes, which should be paid by the seller. We earn only 4-5%. If you ask us to pay 16% tax which should be paid by the seller, who will do an ecommerce business in India? We’re entrepreneurs and entrepreneurs work for their gain and public good. They don’t work for their own destruction.
Thankfully, with all the intervention from the ecommerce companies, there are three states (Delhi, Kerala and Rajasthan) which have a legislation which says that ecommerce companies are not sellers. They’re service providers. The only thing they have to do is provide the information about sales on the sites, and then the duty is of the government to do any reconciliation. That’s the right way to legislate.
5. The Companies Act: If you’re an entrepreneur, you would realize that it’s a big pain for you to enhance your wealth, and that’s why most of the good technology companies are setting up their base outside of India. Our law says that a promoter of a company, ESOPS cannot be given to promoters, so how do I create wealth? I will naturally go to Singapore, Mauritius or Cyprus. There are things which are more regressive under the Companies Act, maybe good for very big and listed companies, but not for new age companies hungry for very fast growth.
6. Section 79 of the Income Tax Act: If you have more than 50% of your shareholding changing hands, your accumulated losses cannot be carried forward next year. Most consumer Internet companies have their lifecycle. For the first 10 year, they do very heavy investments in team, promotion and technology, without any income. Whatsapp doesn’t have any income. Facebook doesn’t have much income. They’re mostly investing. At that stage in life, there will be multiple companies coming and investing since you’re raising capital. In any year, if there is a 50% or more change in the capital structure, you lose your entire loss. This is not a profitable business. It is meant for those who want to abuse the law to gain advantages, but the startup companies don’t want to abuse the law. It is how they work.
7. Payments: The backbone of ecommerce is payments. Whenever we use credit card offline, say, in a petrol pump, you have to use a PIN. If you use your card online, you have to use a code which comes on your mobile phone. The government is looking to promote offline usage of credit cards, by saying that up to Rs 2000-3000, you don’t need a PIN. One swipe and you’re done. They feel fraud can happen more online than offline. Online, it is 128 bit encryption and secure, while offline, cards can be skimmed, so it is riskier. I fail to understand.
8. Dealing with Fraud: It is a big issue in terms of consumer Internet ecommerce. Most consumer internet companies do ecommerce forensics, but I don’t know how many of you have ever gone to a policeman, a sub-inspector or a constable with a cybercrime complaint. If you have, then you know their understanding level. It is a big pain to convince that a database has been compromised, which is valued at $200M. He’ll say “Bhaiyya, CD toh chori hoyi hain” (a CD has been stolen). If you tell a policeman or even in the judiciary that there’s a virus in the system and this virus has completely disrupted my telecom infrastructure, the person will not touch the CPU, fearing infection. But when you’re in trouble if your first destination is the police station and the next is the judiciary. The level of understanding is not appropriate. You need immediate resolution. These are not cheque bouncing cases. These are hardcore data theft, trade secret issues, and you need immediate reaction. But it will not happen. You might get a response in one of a hundred cases.
A few other issues (which he didn’t go into detail on):
9. The Food and Drug Administration is going after online sites for the sale of online drugs and they’re trying to regulate it. I don’t know how they will regulate them.
10. SEBI is coming up with a listing platform for allowing startup companies to list, but if you read between the lines, a big company like ours, it is quite challenging for us to list because of size, and if we have to list we have to list on the main platform, but a small company will still face challenges.
My recommendation is, lets not do a hush hush step to regulate this industry. Let’s promote this industry by making the existing regulation more flexible. Let this industry grow at a very fast pace. Let it overshine, the glory that India has received from the software industry. If you believe it has overshadowed other industries, let us talk after 3-4 years. It has just started. Don’t stop it right now.
During the Q&A, Chandra was asked whether ecommerce is designed to kill the offline retail market?
“The intent of ecommerce is not to kill the offline market, but the intent is to give an additional channel of sales to the nation. Take the example of the music industry: we used to have cassettes. Now everything is being consumed online. Those music companies which got aligned are thriving. Those who didn’t align are filing for bankruptcy.”