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#NAMApolicy: Press Note 3, regulating pricing, deep discounting, and anchor sellers in ecommerce

This report is the third in our series covering the discussion on the different aspects of eCommerce policy and the impact it has on every aspect of the internet, including digital products and anti-competitive issues, privacy, protectionism. Read the first and second here (all here). The discussion was held on October 10, in Bengaluru.

What follows is a paraphrased and edited transcript of the session.

Why Press Note 3 and the E-commerce policy?

  • When Press Note 3 came into the picture, the regulator wanted to ensure that what you couldn’t do offline, you shouldn’t do online. B2C and B2B trading was already there back when the new age companies came with the funda of launching marketplaces. They did not want to get into B2C, which is why they could have FDI, because there were regulations, or sectoral caps for retail trading at the time. (Winnie Shekhar, IndusLaw)
  • Press Note 3 created more confusion, when the government began looking at ecommerce as buying and selling of goods and services, they began regulating e-commerce from this prism. The regulation said that if you’re a manufacturer, you can sell. If you’re a marketplace, you are only a facilitator and you should not influence prices, or define how much can be sold, or how discounts should be funded. (Winnie Shekhar, IndusLaw)

Regulating pricing and deep discounting

  • The government has not clarified why they want to regulate this pricing. Although they’re saying these platforms are simply facilitators, it goes back to how you look at an intermediary versus what these platforms really are. The pricing regime is not being enforced even today, an Amazon seller in Ahmedabad or Bhuj simply does not have the ability to give 80% discount. The discount is being funded by the respect of the platforms. Am I influencing prices? Yes. Does the law say I’m not supposed to influence prices? Yes. Do I legally comply with the law? Absolutely yes. The government needs to rethink its policy because it has not changed its stance. If there’s no enforceability, what’s the purpose of the law? (Winnie Shekhar, IndusLaw)
  • Why regulate services under a trading policy? They should clarify their stance on services, because what I can do offline, I should be allowed to do online. There is no restriction in terms of pureplay service providers offline. If I was only an offline service provider, I wouldn’t be subjected to any restrictions. Why should I be subjected to any restrictions if I was doing it online? This issue is not part of the proposed policy. According to me, services are for consumption, you can not buy a service and sell it further. It shouldn’t be within the ambit of trading, which is where Press Note features. (Winnie Shekhar, IndusLaw)
  • The ban on influencing prices is coming from an FDI regulation. If the rationale is that consumers will be harmed from predatory pricing resulting from influencing prices, thats a different conversation. (Nehaa Chaudhari, Ikigai Law)
  • Price influencing is a competition issue rather than a FDI issue. FDI is the wrong place to regulate marketplace or anti-competitive behavior. Deep discounts by itself are not bad as long as they are not harmful for the consumer. Free market, competition, and innovation benefit the consumer. The argument that small traders cannot compete with online marketplaces because they have deep pockets is a larger structural issue, which raises questions like what are the problems small traders are facing: overhead costs, permissions, access to funding, labour laws, etc. It is not a pricing or discounting issue. (Nikhil Narendran, Trilegal)
  • The pricing clause in Press Note 3 is justified by the social equity, an issue of competition of traders versus e-commerce platforms: this is not something that should apply to only foreign players, but equally to domestic ones like Biyani or Reliance. The restrictions stems from fear of foreign capital, rather than protecting the current social order, and weaker trader section. (Nikhil Narendran, Trilegal)
  • Deep discounting is offered by chains like Croma and Reliance as well, why are they allowed, but ecommerce players not? They even said there would be a sunset clause for all of this. (Winnie Shekhar, IndusLaw)
  • In my opinion, brick and mortar stores have a natural catchment area, if there’s a store in Forum Mall in Bangalore offering 80% discount on a refrigerator, I’m not going  fly from Delhi to buy the fridge. The e-commerce companies have much larger inventories and no such catchment area. Their business model involves delivering to all of India. The impact of them offering deep discounts is going to be much larger than any brick and mortar store offering the same discount. (Prithwiraj Mukherjee, IIM Bangalore)
  • When we talk about deep discounting offline, we’re talking about that one tiny brick-and-mortar store, but large offline chains that with a pan-Indian presence. Additionally,  if you’re trying to examine anti-competitive conduct in terms of deep discounting by online retailers versus the discounts offered by this one brick-and-mortar store, they are both competing in the same market. Its like trying to equate apples and oranges.The CCI has addressed some of these issues, but there is  some inconsistency in how they see what constitutes a relevant market. It has either sidestepped the question or given an inconclusive answer. (Nehaa Chaudhari, Ikigai Law)
  • Binny Bansal recently said at an event that when they first founded Flipkart, somebody asked them to produce 3 years’ old rental agreements for a government registration, and they didn’t have that. Ease of doing business is more important than protectionism right now. Entrepreneurs in India deal with huge regulations from the beginning. (Winnie Shekhar, IndusLaw)

E-Commerce vs retail: a false binary?

  • Creating a false binary between E-commerce and retail: If you’re allowed to do something offline, you should be allowed to do it online. The e-commerce versus retail is a false binary, because a hybrid model wouldn’t exists if only these two categories existed. (Nehaa Chaudhuri, Ikigai Law)
  • Ecommerce is a spectrum harming small ecommerce players: Second, e-commerce is a spectrum and the draft policy has not given the nuances enough thought. The Amazons, Flipkarts and Snapdeals are at one end of the spectrum. But there are also really small players which are just starting out. For them, e-commerce may mean that that they’re manufacturing something, or sourcing products from elsewhere, and setting their own platforms. They are not marketplaces, they’re just marketing their own platforms, and selling them online. The definition of ecommerce in Press Note 3 or the ecommerce policy is so wide, that any kind of online buying or selling will be construed as ecommerce. (Nehaa Chaudhuri, Ikigai Law)
  • Issues of data and dynamic efficiencies: E-commerce has fundamentally been a tech and internet-enabled disruption in traditional markets. It has changed the way we undertake basic economic activities like buying and selling goods. Dynamic efficiencies mean competition on the basis of innovation in tech and product and not on the basis of what is static i.e. is price. Data-related issues around platforms and access to data do not apply differently to offline and online platforms.
    • Say Amazon holds a large amount of data, and someone says that it leads to monopolistic tendencies. You have to have that conversation for a Reliance or Future Retail too, even they have access to a large amount of data. We have to examine these as issues and not get caught up in whether its an e-commerce platform or an online retail platform. On  the principle level, the issues of market competition, innovation, consumer benefits, efficiencies, exist regardless of whether it’s offline retail or online retail. (Nehaa Chaudhuri, Ikigai Law)

Anchor sellers

  • Anchor sellers: At the same time, the government does not want the ecommerce companies to have their own people sell on the platform. First, they’re saying that group companies should not influence prices. Second, they say that you shouldn’t allow a single person or their affiliates, to sell more than 25% on your platforms. This began when the B2C-B2B structures were disturbed, wherein the B2C entity was really selling almost 80% on the platform. Now the government is saying that you wouldn’t qualify as a marketplace, and hence for FDI, please come and take an approval. (Winnie Shekhar, IndusLaw)
  • There is a  huge amount of convergence occurring between retail and e-commerce. There are no classic retailers, who are not doing e-commerce, and there are hardly any ecommerce players not doing retail. There needs to be a second look at e-commerce regulation and retail regulation altogether. We don’t have an anchor seller rule for offline retail purely because there is no fiction of a marketplace in offline retail. Although technically, there are marketplaces, there are no restrictions on how an offline marketplace should behave. (Nikhil Narendran, Trilegal)
    • Many marketplaces have come up with structures to ensure that 4-5 anchor sellers are present on the platform, while being compliant with the 25% rule. A person purchases on ecommerce not for the just the product, but also the experience being sold to them, which is a combination of a speedy shopping experience, the returns, discounts, etc. The regulation has reinforced the fiction of the marketplace, and have asked these companies to comply with rules. They’ve all successfully come up with a set of rules which work for them. The anchor concept should not exist in this world anymore. (Nikhil Narendran, Trilegal)
    • The government has been saying that companies have a  moral obligation to comply with the 25% anchor seller rule, which is just a fancy term. Companies are complying happily complying with it. We need to move away from the anchor seller concept, and even the marketplace model, and move to a situation where there is parity between treatment of offline and online. (Nikhil Narendran, Trilegal)

Read all the reports in the series of discussions held at Delhi and Bangalore here.

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