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Proposed Amendments to the E-Commerce Rules – the Good, the Bad, and the Ugly

By Rahul Rai and Shruti Aji Murali

A little less than a year since their release, the Consumer Protection (E-commerce) Rules, 2020 is being amended. The proposed changes reflect the collective concerns raised by consumers, traders, and associations, according to a  press release by the Ministry of Consumer Affairs, Food and Public Distribution. 

The changes aren’t surprising. They follow months of sustained campaigning by traders and their associations, led by the Confederation of All India Traders (CAIT), against marketplace e-commerce platforms. CAIT has petitioned the Department for Promotion of Industry and Internal Trade (DPIIT) seeking enforcement of foreign direct investment rules for foreign e-commerce platforms in “letter and spirit”. It has sought the Competition Commission of India’s (CCI) intervention and advocated for an expeditious inquiry against Amazon and Walmart-owned Flipkart. 

It seems to have found a sympathetic ear with the Minister of Consumer Affairs. In a recent event, the minister accused Amazon and Flipkart of flouting Indian laws and engaging in forum shopping. He minced no words and called them arrogant

CAIT’s imprint on the proposed E-commerce Rules is unmistakable. So is the distrust within e-commerce platforms. The relevant issue though is not about CAIT’s advocacy against e-commerce platforms. Neither is it about Amazon and Flipkart’s compliance with Indian laws, forum shopping or perceived “arrogance”. It’s about the ability of rule-makers to sift through the noise, overcome their prejudices, and frame rules that follow the parent legislation. In this case, the Consumer Protection Act, 2019 (COPRA).    

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A group of traders can’t dictate rules that affect all Indian consumers. Neither can the rules be informed by the perceived arrogance of any stakeholder. Although, the proposed E-Commerce Rules appear to have fallen into this trap. They seem to be aimed at appeasing the traders’ concerns. They seek to puncture Amazon and Flipkart’s arrogance. Consumers are a side note. 

All the proposed changes aren’t bad though. Some are good, while others are ugly. 

The Good:

The COPRA seeks to balance the uneven relationship between individual consumers and manufacturers, service providers, sellers, and e-commerce platforms. It does so by creating a set of rights that a consumer can enforce against institutions that engage in the manufacture or sale of goods or services, including through e-commerce platforms. These rights empower the consumers to seek recourse against deception, falsehood, and exploitation. 

For example, consumers can sue a manufacturer for misleading advertisements. They can challenge standard contractual terms as being one-sided and hence, unfair. They can file a case for the provision of defective goods, deficient services, higher-than-agreed prices, and false representations on quality. 

As businesses evolve, newer possibilities for consumers to be cheated emerge. The draft E-commerce Rules seek to pre-empt some of these possibilities. 

They expressly define, “mis-selling” as a deliberate misrepresentation by an e-commerce entity, about goods or services that may be suitable for the purchaser. E-commerce entities are prohibited from mis-selling and manipulating search results to mislead users. Sponsored listings must be distinctly marked as such. Best before or use before dates need to be prominently displayed. These changes uphold the guarantees that the COPRA sets out. As the recent survey by Local Circles indicates, Indian consumers want such protections. These changes were needed. They are welcome. 

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However, as we examine the other changes, the distance between the promises that the COPRA holds, and the proposed E-commerce Rules increases.  

The Bad:

The COPRA doesn’t seek to burden manufacturers, service providers, sellers, and e-commerce entities with additional layers of compliance requirements. The draft E-commerce Rules do. 

All e-commerce entities must register with the Department for Promotion of Industry and Internal Trade (DPIIT), secure a registration number, and prominently display this badge of honour on their platform. To what end? There’s no clarity. 

Imported v. Domestic Alternatives

If they sell imported goods, they must display the name of the importer, specify the country of origin, and suggest domestic alternatives. The first two will inconvenience the e-commerce firms but may not weigh them down. The third will. 

Import bills typically contain the names of the exporter/importer and country of origin. But now, an e-commerce firm must dedicate separate resources to find appropriate domestic alternatives. Will this help preempt any unfair or restrictive trade practice under the COPRA? Unlikely. Will it spur consumers to buy domestic products over imported ones? Still unlikely.  

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Rational consumers seek to maximise the value for their investment each time they buy something. A luxury car buyer shopping for an imported S-class from Mercedes Benz won’t bother examining alternative Indian-made sedans.

Consumers shopping for essentials will pick Indian alternatives only when they offer a better value for money. And if they do, then quite likely that consumers will find a way to locate them. 

What if the e-commerce platform sells services through subscription? For instance, will Netflix have to list an Indian alternative to every Hollywood-produced web series it carries? Will Google Play Store have to identify and display applications developed by Indian entities for every app developed in Silicon Valley? The list of such questions is unending. 

All e-commerce entities must appoint a chief compliance officer (CCO) to ensure compliance with the COPRA and E-commerce Rules. They must also appoint a nodal contact person for 24X7 coordination with law enforcement agencies. Further, they must appoint a Resident Grievance Officer. 

These requirements are burdensome. A boot-strapped e-commerce platform has scarce capital and a bagful of worries. In 1995, Amazon had just 11 employees. Young firms don’t have the budget to hire an army. Nor the need. The draft E-commerce Rules would add the burden of at least 3 full-time employees. One of them would have to work 24X7! 

The additional compliance requirements for e-commerce firms, big and small, will do more harm than good. They are at odds with Prime Minister Modi’s Startup India Initiative. They will undo all the hard work done by various departments in improving India’s ranking in the World Bank’s ease of doing business index. Their utility to consumers is meager if any.

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The Ugly:

The third set of changes to the E-commerce Rules are most troublesome. They have nothing to do with consumer protection or COPRA. Legally, they are untenable. For consumers, they are harmful. 

Prohibition on abuse of dominance is untenable

For example, the rule prohibiting abuse of dominance by e-commerce firms does not follow the provisions of the COPRA. The COPRA’s objective is to protect consumers from business practices that have an element of deceit, fraud, or exploitation. Prohibition of abuse of dominance is the sole responsibility of the CCI under the Competition Act, 2002 (Competition Act). 

The Indian Parliament has expressly ousted the jurisdiction of all civil courts in dealing with potentially anti-competitive practices, including abuse of dominance. CCI alone can pursue such cases. Consumer courts have no role to play in such cases.

Restrictions on marketplace e-commerce entities will hurt consumers:

Likewise, the entire range of restrictions proposed on marketplace e-commerce entities seeks to pre-empt potentially anti-competitive business practices. Specifically, the restrictions on – (a) use of data collected by the platform for the unfair advantage of its related parties or associated enterprises; (b) related parties or associated enterprises from acting as sellers; (c) sale of goods or services by a platform to its sellers; and (d) advertisement by the platform to promote a body of sellers to subsidise a sale on its platform, are all aimed at one common enemy – marketplace e-commerce entities and their ability to create value for consumers. 

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CAIT doesn’t like it. Its members want to continue to extract the consumer surplus in their respective small catchment areas. Online retail comprises a small but growing fraction of India’s overall retail market. Consumer preference for online retail is challenging the entrenched localised monopolies of physical retailers. Naturally, they want to restrict the consumers from choosing a more convenient mode of shopping. The proposed restrictions against marketplace e-commerce entities will do just that. 

Inventory-based e-commerce retailers need not rejoice. They will be the next target. The proposed changes may accelerate their growth. They may become the next Amazon or Flipkart. But if E-commerce Rules are changed to appease the physical retailers, then they will change again.  

Indeed, the proposed ban on flash sales which applies to all e-commerce entities sends out a stern warning. E-commerce entities cannot get rid of their old inventory. Consumers who save to buy relatively older stock during flash sales must now pay more.  This proposal isn’t just bad. It’s sinister. Millions of Indians scrimp on essential expenses to put food on the table, provide for education, and healthcare. Physical retailers want to rob them of their hard-earned (saved) well-being. The proposed changes will facilitate this loot. 

Fallback liability for marketplace e-commerce entities is irrational:

Ironically, while all the proposed changes targeted at marketplace e-commerce entities are aimed at disassociating them from sellers, one change wants them to be responsible for sellers’ sins. They must now be subject to “fallback” liability for sellers’ misdemeanor. It doesn’t make sense. It shifts the burden of ensuring compliance with the E-commerce Rules onto marketplace platforms, which will have little to no influence on the sellers. 

Related and associated parties make everyone an E-commerce entity:

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Definitions give meaning to the disciplinary boundaries that statutes or rules prescribe. They must neither be too narrow nor too broad. By expanding the definition of the term “e-commerce entity” to include “related parties” and adding the layer of “associated parties” to the restrictions imposed on marketplace e-commerce entities, the Ministry of Consumer Affairs presumably seeks to address physical retailers’ objection to preferred sellers. If this proposal is accepted, several unintended consequences will follow. The corporate relations between firms comprising the entire stack of e-commerce services – sellers, logistics service providers, payment service providers, technology support, and customer support will have to be de-linked. Doing so will unravel the complete business model of e-commerce firms.  

What Next?

The Ministry of Consumer Affairs’ consultative approach is laudable. It must engage in wider consultation before rushing in to implement the proposed changes. Their impact on consumers, Indian entrepreneurs, and all other stakeholders will be significant. If the idea is to ensure that e-commerce platforms do not engage in anti-competitive practices or follow the investment rules, then the ministry must engage with the CCI or the Enforcement Directorate and Reserve Bank of India to plug the gaps. The Competition Act in fact contains an express provision to facilitate such conversations. 

Consumers are central to COPRA. No other interest should dictate the rules that follow from it. 

Rahul Rai and Shruti Aji Murali have worked with leading Indian law firms that advise big-tech companies on various issues. Currently, they are not advising or representing any big-tech firm, directly/indirectly in any ongoing case before the CCI or any other court. Views expressed here are personal and do not reflect the views of MediaNama. 

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