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Deep Dive: What’s wrong with India’s e-commerce rules and how can they be fixed?

The Parliamentary Standing Committee on Commerce’s report asseses the e-commerce landsape in India and makes recommendations on improving it.

Hold domestic e-commerce players to the same standard as foreign-funded ones, carve out exceptions for small businesses in the proposed amendments to the E-Commerce Rules, let the Competition Commission of India (CCI) deal with competition-related issues, implement adequate cybersecurity measures to make online shopping safe, strengthen intellectual property laws to accommodate e-commerce nuances, and collect more data to assess the impact of e-commerce on the Indian economy are among the recommendations made by the Parliamentary Standing Committee on Commerce in its report on Promotion and Regulation of E-Commerce in India presented to the Rajya Sabha on June 16.

“The e-commerce market in India exhibits a clear pattern of concentration, where few e-marketplace giants hold control over a large part of the market, making them indispensable for sellers/business users seeking access to such e-marketplaces’ sizeable online consumer bases. […] The Committee, in its Report, observes and analyses the various competition issues that are prevalent in the e-commerce marketplace with the objective of ensuring that benefits of the e-commerce ecosystem are reaped by all the stakeholders, viz., the platform, the sellers and the buyers/consumers.” — Parliamentary Committee Report

The Committee also urged the government to roll out the National E-Commerce Policy, which was first proposed in 2019, after taking into consideration the various recommendations made in the report.

Why does this matter? The Parliamentary Committee report, which was prepared after taking in the views of various central and state government entities, think tanks, industry groups, and e-commerce companies, has the power to shape e-commerce regulations going forward and serves as a good indicator of what we can expect in any upcoming draft regulations.

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Efficacy of FDI policy is limited in scope and enforcement

FDI policy only focuses on foreign-funded platforms: “The Committee was informed that the extant FDI policy attempts to promote fair and competitive e-marketplace by targeting a number of anti-competitive practices such as self-preferencing, lack of platform neutrality, deep discounting, exclusive agreements, and preferential treatment to selected sellers. However, the efficacy of the FDI policy in promoting fair competition in e-marketplace is limited given the fact that it is applicable only to foreign-funded e-commerce entities resulting in the domestically funded e-commerce entities escaping the obligations under the FDI policy,” the Committee remarked. According to India’s Foreign Direct Investment (FDI) regulations, e-commerce entities with foreign funding can only operate as a marketplace and not as an inventory-based platform. A marketplace e-commerce entity merely facilitates a platform for third-party sellers whereas an inventory-based e-commerce entity sells products of its own.

  • Recommendation: The Committee opined that “a holistic framework that addresses these issues, irrespective of the marketplace being funded by foreign or domestic entities, is the need of the hour.”

Enforcement efficacy is diluted because due to enforcement by multiple regulators: “The fact that obligations under the FDI policy are formulated and notified by the DPIIT but enforced by the Enforcement Directorate has reportedly led to confusion and dissatisfaction amongst several trade organisations regarding its enforcement efficacy,” the Committee stated.

  • Recommendation: The Committee recommended that “the enforcement mechanisms under the FDI policy are effectively strengthened and proactive actions are taken against e-commerce giants that are found to flout the FDI rules.”

Frequent revisions of the policy harm ease of doing business: “Many market players have also alleged that uncertainty around the FDI policy given its frequent revisions that require expensive internal restructuring, reduce the ease of doing business,” the Committee observed. In the last couple of years, the government has published multiple Press Notes to modify the FDI regulations to address various loopholes that companies had been exploiting.

  • Recommendation: The Committee opined that there should be a stable FDI policy to bring about certainty and boost the confidence of potential investors.

Proposed amendments to E-Commerce Rules are onerous and overreaching

Requiring e-commerce entities of all sizes to appoint compliance and grievance officers will be onerous: According to the proposed amendments to the Consumer Protection (E-Commerce) Rules, 2020, released in June 2021, all e-commerce entities must appoint a Chief Compliance Officer, Nodal Contact Person, a Resident Grievance Officer and set up a Grievance Redressal Mechanism. The Committee noted that while “the above measures are a welcome step in fostering accountability for e-commerce entities, a blanket applicability of such requirements upon all e-commerce entities irrespective of their size may prove to be onerous and cumbersome for smaller e-commerce companies and startups. In fact, the increased compliance costs and exposure to liability may decelerate the growth of smaller e-commerce businesses and drive potential competitors of existing incumbent giants away from the Indian e-commerce market.”

  • Recommendation: The Committee recommended that a calibrated approach be adopted towards regulating e-commerce entities and the additional duties and liabilities sought to be introduced through the amendments be made applicable specifically to only e-commerce entities that qualify a certain threshold, devised to target e-commerce giants.

Proposed rules overlap with CCI’s mandate: The proposed amendments also include provisions to promote free and fair competition, by placing prohibitions on abuse of dominance, unfair pricing and self-preferencing. The Committee noted that these issues fall “squarely within the mandate of the Competition Commission of India (CCI) established under the Competition Act, 2002, and transplanting the same powers in e-commerce regulations may result in enforcement overlaps, forum shopping and regulatory arbitrage.” The Committee further noted that “such an overlap of the mandate will give an advantage to existing e-commerce giants which have the money and manpower to devote to multiple legal proceedings.”

  • Recommendation: The Committee opined that “the manner of regulation of e-commerce platforms and division of responsibility amongst regulators be consciously designed with a view to avoiding overlaps of mandate.” The Committee further recommended that a robust mechanism of co-operation between regulators and the CCI must be devised “to bring about increased enforcement success, administrative efficiency, expertise building as well as bolstering the ease of doing business.”

Prohibition on flash sales is ambiguous: The proposed amendments prohibit flash sales, which are defined as sales “organized by an e-commerce entity at significantly reduced prices, high discounts or any other such promotions or attractive offers.” However, the Ministry of Consumer Affairs later said that conventional flash sales are not banned and only specific flash sales or back-to-back sales which limit customer choice, increase prices, and prevent a level playing field are not allowed. “The above distinction between conventional flash sales and other specific flash sales that are sought to be banned appears to be ambiguous,” the Committee noted.

  • Recommendation: The Committee suggested that clarity on the precise scope and applicability of the prohibition on flash sales be provided in the proposed rules.

Infringements of intellectual property laws a major concern in e-commerce

Several cases of trademark and copyright misuse by counterfeit goods: “There are currently several significant IPR (Intellectual Property Right) infringement issues including misuse of trademark and copyright. According to the Authentication Solution Providers’ Association (ASPA), India suffers a loss of over Rs. 1 lakh crore a year owing to the sale and purchase of counterfeit goods. While India has a well-defined legal and regulatory framework for the protection of IPRs, it is yet to completely update the laws for complete efficiency in the virtual world,” the Committee remarked. The unhindered presence of counterfeit products “negatively impacts the revenue of genuine manufacturers and the absence of protection to the trademark and copyright products may also act as a deterrent to innovation,” the Committee added.

  • Recommendation: The Committee recommended that the IPR Act be strengthened and adapted for the e-commerce space. The Committee also recommended that due diligence measures be “imposed on the sellers and platforms to ensure that the products sold on platforms are authentic and do not infringe upon Intellectual Property Rights” and “the sellers of counterfeit products should be made to pay the loss suffered by the genuine rights holder and must be barred from the e-commerce space.”

Should marketplace e-commerce entities be held liable for products hosted on their site?

Safe harbour provisions not upheld in courts: The Committee observed that the safe harbour provisions that marketplace e-commerce entities are accorded are not usually upheld by consumer courts due to the intermingling of roles and responsibilities of various players in the case of e-commerce transactions. Safe harbour provisions resolve intermediaries of liability for content posted by third parties. Without these provisions, e-commerce entities can be held legally liable for defects in products sold by third parties.

  • Recommendation: “A codified law that recognises the liabilities and responsibilities of parties involved in handling e-commerce transactions is required. The regulation should account for roles of different service providers which would facilitate the consumer courts to attribute responsibilities for defects and deficiencies of products and services appropriately,” the Committee said.

Will not be in the interest of consumers to totally absolve e-commerce platforms: The proposed amendments to the E-Commerce Rules, 2020, also propose to impose fallback liability on e-commerce marketplaces for any negligence by sellers in fulfilling their duties. This provision was proposed to prevent consumers from being affected when a seller fails to deliver the required quality of goods or services. E-commerce platforms, however, objected to this saying they only act as intermediaries by providing the software solution to connect sellers and buyers, and have no control over the conditions of the contents being delivered. In response, the Committee noted that it will “not be in the interest of customers to totally absolve e-commerce marketplaces of their responsibility in maintaining the quality and standard of goods sold on their platforms.”

  • Recommendation: The Committee recommended that e-commerce marketplaces should play an active role in the resolution of issues related to the delivery of sub-standard counterfeit products and services. The Committee further recommended that codified guidelines that assign roles and responsibilities of the parties involved in the e-commerce transactions should be formulated in a balanced manner.

High scope of exploitation of data

Without regulations, data can be used by a handful of companies to distort competition: E-commerce firms collect data of the customers as well as of sellers on their platform. This data might be used by platforms to predict shopping habits, for targeted advertisements, etc. “The Committee is perturbed at the absence of a policy and regulatory framework around the use of data which may result in misuse and exploitation of data by a handful of companies which when coupled with network effects might distort competition in e-marketplaces,” the Committee remarked.

  • Recommendation: The Committee proposed that The Personal Data Protection Bill, 2019 be enacted without further delay. The Committee further recommended that clear guidelines regarding the use and sharing of data generated on e-commerce platforms are formulated and introduced at the earliest.

Cybersecurity measures are lacking

Inadequate cybersecurity measures are discouraging customers and businesses from online shopping: Cyberattacks and cybercrimes have been on the rise last couple of years, raising concerns for customers regarding the safety of online shopping and discouraging business entities from shifting their business to online platforms. “Further, small businesses do not have the financial and technical capability to protect themselves against cyber-attacks which result in downtime in their operation due to such attacks, thereby, affecting their business,” the Committee stated. The Committee also pointed out that the existing network of cybercrime investigations through local police stations is highly inadequate.

  • Recommendation: The Committee recommended introducing a National Cybercrime Policy or legislation that lays down the framework for addressing all aspects related to cybercrime such as skilling and training in digital crimes investigation, creation of a dedicated cybercrime division, cybersecurity standards, investigation process and grievance redressal mechanism, capacity building of stakeholders, etc. The Committee further recommended that the government keep in mind the interests of the small businesses and enable them to adopt an appropriate cyber security framework.

Security reliant on financial literacy: The Committee observed that the “financial security system that is in place for ensuring secure financial transactions and protection of financial data relies heavily on the alertness and financial literacy of the customers.”

  • Recommendation: The Committee, therefore, recommended banking institutions and e-commerce platforms “to create awareness among customers regarding sharing of sensitive financial data.” The Committee further recommended that periodical cyber security audits be undertaken by e-commerce platforms, payment gateways and payment aggregators and financial institutions.

Lack of information about the impact of e-commerce on the economy

Information on e-commerce’s impact on GDP and employment not available: “The Committee is perturbed to observe that critical data regarding e-commerce such as share of the e-commerce market in GDP and direct and indirect employment generated by e-commerce sector has not been collated and maintained by the Government,” the Committee said. “Such data forms crucial inputs in formulating a long-term policy for the e-commerce sector and enables data-based policy formulation,” the Committee added.

  • Recommendation: The Committee suggested that the DPIIT direct its resource towards maintaining appropriate data regarding e-commerce and make it readily available.

E-commerce companies not registered with DPIIT: The Committee also pointed out that e-commerce companies are not registered with the DPIIT and registration will be the first step towards streamlining the regulation of e-commerce and will also assist in gauging the progress of the sector.

  • Recommendation: The Committee opined that DPIIT make it mandatory for all e-commerce companies to be registered with them. The Committee added that the registration process must be simple and in line with the ease of doing business.

Additional concerns that the National E-Commerce Policy should address

“The Department should understand the vibrant and dynamic nature of the overall online commerce ecosystem while formulating policy and regulation, and should be cautious not to implement a one-size-fits-all mechanism to regulate the diverse e-commerce models,” the Committees said while urging the government to consider the following factors when rolling out the National E-Commerce Policy, in addition to the recommendations made above:

  • Formulate definite mechanisms for e-commerce players to enable self-regulation
  • Address the concerns associated with quick commerce like the creation of dark stores and the safety of riders
  • Ensure the protection of consumer rights and privacy through the inclusion of a pro-customer regulatory framework.
  • Ensure the protection of personal data in consonance with the upcoming Personal Data Protection Bill.
  • Address the concerns of the traditional brick-and-mortar shops and local businesses and lay out a strategy and road map for onboarding them on the e-commerce platforms
  • Frame suitable social security schemes relating to insurance, working conditions, disability and other benefits, and also formulate appropriate labour laws relating to working hours, holidays, minimum pay, etc., for gig and platform workers, and mandate e-commerce companies to extend such benefits to them

This post is released under a CC-BY-SA 4.0 license. Please feel free to republish on your site, with attribution and a link. Adaptation and rewriting, though allowed, should be true to the original.

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