This report is the second in our series covering the discussion on India’s Draft E-commerce Policy (whose fate still hangs unclear). Read the rest here.

“Right now, when you ask investors to give founders preferential voting rights, they’ll say ‘oh, but that’s not standard’. If the law recognizes it, that conversation becomes easier.” — Divya Varghese, Induslaw.

On September 26th, MediaNama held an open house discussion on the draft national e-commerce policy in Delhi. Notes from that discussion follow.

Preferential voting rights

Preferential voting rights allow founders to retain voting rights even as they no longer hold a majority of their company’s shares.

  • Why founders want preferential voting rights: At the end of the day, investors are there to make money. They are there for the exit. As more and more rounds of investment happen, the founders lose their shareholding, and therefore control of the board. (Varghese)
  • A middle ground for founders: The founder isn’t looking at economic interests from shareholding for preferential voting rights. So you could give them shares that have voting rights but no economical interest. So investors have the value appreciation from shares, and founders get the voting rights. (Varghese)
  • A basic version of preferential voting shares: Right now, it’s more common for founders to have veto rights than differential voting rights. It was only recently that private companies were allowed to exempt themselves from Section 43 and 47 of the Companies Act, which governs the type of shares that a company can have. (Varghese)
  • Why e-commerce companies don’t have preferential voting: The Companies Act actually allows for differential voting rights. Tata Power, Future Retail and other such companies have it. But you need a profit period of three years, which nearly all e-commerce companies do not have. (Ruchika Tomar, MakeMyTrip, participant)
  • Ola got differential voting before they needed to: Ola was smart to get differential voting rights for founders before they had a need to do it. They smelled what was coming in and put it in their Articles. Veto rights went into their Articles. For important matters, investors can’t do anything without founders’ consent. As founders’ shareholding dilutes, they start asking for this. There are exits that can scare the founders. (Varghese)

International trade agreements

  • E-commerce at the WTO: At WTO we have had e-commerce provisions since late ‘90s. Progress has been slow, so countries enter bilateral agreements on internet-related issues like source code and digital services and products. But this was with countries with like-minded approaches on regulation of digital issues. (Jyoti Panday, researcher)
  • Regional trade agreements and e-commerce: Since 2016, there is significant movement with a division in WTO. EU, US, Canada, Australia pushed on rules on e-commerce since China has become a contender, because Chinese homegrown companies are in the top 20 internet companies globally. US companies like Visa and Mastercard complained and said China has strict policies. So they approached the WTO and WTO ruled in favour of US saying that as long as people fulfill provisions and obligations, you must provide market access to financial companies. It’s 2018 and that market access is pending. (Panday)
  • The Trans-Pacific Partnership: Because WTO frameworks weren’t evolving at the same rate of technology, and countries were afraid of a fragmented world order, certain regional agreements came into play. TPP, which was US-led under the Obama administration was first regional agreement. They formed a chapter on e-commerce, which is till date among the most comprehensive and lists out digital trade issues. Trump withdrew but remaining countries have gone ahead. US is key player though. Lots of provisions have been watered down. While TPP negotiations were happening, China started their own called Regional Comprehensive Economic Partnership, where India is a negotiating member. (Panday)
  • Having an e-commerce policy is an advantage in trade pacts: When we go to negotiating table, certain parameters don’t align with either of these quarters. Given that RCEP is something we’re trying to close and finalize by end of this year, having a domestic e-commerce policy would help in those global negotiations. E-commerce happens to be one of the issues that the RCEP negotiations are stuck on at the moment. (Panday)
  • How powerful is the WTO? WTO is so slow moving, because these challenges haven’t happened, WTO isn’t a framework where pushback would happen. RCEP is where pushback might happen. There are exceptions where you’re creating a good environment for domestic companies. If it’s at the cost of weakening global trade arrangements where you’re foreclosing foreign companies from accessing your market, that will be contested. (Panday)
  • Human rights and including e-commerce in trade negotiations: The RCEP that China and India are negotiating has an e-commerce chapter. TPP includes a provision on no mandatory source code disclosure. China and India may want to retain rights like this as leverage. It’s got huge human rights implications. US companies can, for example, say, you can’t modify the software on this tractor, and you have to call their service centre to implement a fix. Source code disclosure may be technical but has a significant impact. (Panday)
  • A consultative process needs to happenThis is the issue with any digital governance issues being included at trade agreements. At EFF this is a major reason we were pushing back against these issues being included in trade pacts since these are secret negotiations where only a negotiator represents us. It’s appalling that there were no significant consultations. Given how significant some of the repercussions flowing from these decisions are going to be, it’s significant that we have a TRAI sort of public consultation period before floating policies like these. We need our views accounted. (Panday)

Regulating platforms — Press Note 3

  • What is Press Note 3? RBI is the entity supposed to regulate foreign investment rules under the FEMA. What sectors you can invest and not invest in is governed by the central government under DIPP. Amendments are called Press Notes, and when they’re consolidated, it’s called the Consolidated FDI Policy of India. Press Note 3 of 2016 puts in clarifications on what they mean by e-commerce. They reiterate the intent of the regulation. If you have a website selling things, you cannot own the inventory. Small traders, artisans and everyone can list on the platform, and consumers can buy from there. It does two things:
    – It legislates into how this platform can work. What is the role one single entity can have in the market?
    – Second it says, if you’re a platform you can’t influence prices.
    (Arjun Sinha, Cantor Associates)
  • E-tail vs services: Press Note 3 also creates confusion. It says that e-commerce means buying and selling of goods and services. But the restriction is I can’t do big box retail. There are very few restrictions on the service side of the ecosystem. How do we now have a regulation that limits how online services are supposed to be done when no limits are on the physical version of that service? It cannot be inventory-led. Let’s say I have a company with 10,000 shoeshine boys, is that inventory-led? We all see apps on our phone that provide real-world services, and a delivery person may be an employee or an independent agent. How the inventory led model works becomes slightly confusing. (Sinha)
  • Jurisdiction: These platforms are not reinventing services and products. They may be facilitating access in a far more efficient manner which has impact for our markets. But one of the issues I’ve noticed, which has implications, is because a lot of jurisdictional issues of global platforms is that they’re bound by incorporation somewhere else. If I saw an error in a Shaadi.com ad in a newspaper, I could contest it here, but if there was a similar error on Tinder, then my jurisdiction is suddenly Texas. Sec 79 of the IT Act was improved to deal with these conflicts, and it would be helpful to have a similar remedy for e-commerce as well. (Panday)
  • A tough position to be in: The more you get into Press Note 3, it just confuses an already confusing system, and you lose the nexus with the intention of the law. It’s like a yes/no question, can I invest or not? It becomes slightly tenuous. The ask for legislation is valid. There are people in those discussions, and I can understand the intent. Maybe not e-commerce in itself. As we grow in this country, maybe we need specific legislation to deal with this topic. Again, that may open another Pandora’s box by creating a new regulator. (Sinha)
  • ePacket: In WTO there’s a problem with ePacket service for cross-border e-commerce. The tariffs of China shipping to US is nothing compared to the other way around. We can’t leverage because we haven’t negotiated that in WTO. [Participant]

Quotes are not verbatim and have been edited for clarity and brevity.

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We are bringing #NAMApolicy on India’s draft National E–commerce Policy to Bangalore on Wednesday, October 10. Apply here to attend.