India’s fledgling e-commerce industry needs a robust policy framework

e-commerce policy in india
A comprehensive policy will offer consistency, accountability, and clarity in government actions, helping stakeholders achieve objectives such as job creation, productivity improvement, and protection of consumer interests.

By Krishna Kumar Sinha

It seems the government has developed cold feet about announcing the much-awaited e-commerce policy after questions were raised over its rationale by certain sections within the government. The national e-commerce policy, a draft of which was placed on the public domain in February 2019, sought to create a facilitative regulatory environment for the growth of e-commerce industry. The reason for this U-turn is a lack of convergence on certain issues at a meeting of the inter-ministerial group coordinated by DPIIT. The ministries represented in the meeting are the agriculture ministry, corporate affairs ministry, electronics and IT ministry, and the finance ministry.

Ever since the entry of large e-Commerce players into retail business, traders across the country were challenging the business practices followed by them. They urged the government to put some curbs on their business which, according to them, are detrimental to the traditional retail segment that employs millions of people. The government has asked the Enforcement Directorate and the Reserve Bank of India to examine these complaints against Amazon and Flipkart and take action if they have violated the Foreign Direct Investment (FDI) policy and foreign exchange rules.

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Earlier, the consumer affairs ministry had issued notices to them for not displaying mandatory declarations including the country of origin, which digital platforms ought to follow under the Legal Metrology (Packaged Commodities) Rules, 2011. Amazon is facing complaints and investigations in several countries. The Federal Trade Commission (FTC) of the US also examined whether Amazon’s business model was helping small traders. Probes are going on in various European countries about Amazon’s business model and its conduct.

Disruption in trade due to technological changes is not a new phenomenon — the industrial revolution triggered by the invention of the steam engine to the most recent innovations in the internet technologies have all transformed the structure and dynamics of trade. While it has improved the pace and efficiency of international trade, it has not come without upheavals and uproars. Although the share of e-commerce in India is just around 6% of the total retail trade, the growth rate is substantial. While such disruption is inevitable, so is the reaction of the government. The natural tendency of the government would be to plug the legal loopholes by amending relevant laws and disciplining the players.

Extant laws regulating e-Commerce

The e-commerce is already subject to several regulations on account of its multi-dimensional nature, both at the central and state levels. On the one hand, there are existing regulations covering all forms of trade, such as the competition law, consumer protection law, and RBI digital payments regulations. For any specific business segment, the concerned regulators for that area of business come into play like Medical Council of India in case of e-Pharmacy, transport authorities for App-based taxi services or FSAAI regulations for food products.

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FDI regulations

In India, the e-commerce sector is broadly administered through the FDI policy by way of putting restrictions on foreign players to limit their activities to B2B e-Commerce only, on the lines of FDI policy for multi-brand retail trade. These regulations were the outcome of the apprehension that global giants with deep pockets will affect the livelihood of unorganized “mom-and-pop” shops and small retailers. It was in the year 2000 that the government first notified FDI policy for e-Commerce sector, which was followed by several changes as the sector expanded with the entry of foreign companies.

In 2016, the government brought significant changes in its FDI policy for the e-Commerce sector that defined e-Commerce as “buying and selling of goods and services including digital products over digital and electronic networks,” and also sought to distinguish between the inventory-based model and marketplace model. The government further clarified that while 100% FDI under automatic route is permitted in marketplace model of e-commerce, no FDI is permitted in inventory-based model of e-Commerce. The objective was clear. The marketplace entity will only provide a technology platform to the sellers and buyers for the purchase of goods and services, and would not engage in trading itself or own the inventory.

Even under the marketplace model, a restriction was imposed that not more than 25% of the sales would be permitted from one vendor or group companies. In terms of the FDI policy, a marketplace entity like Amazon or Flipkart is not permitted to exercise any influence, directly or indirectly, on the price of goods or services being offered by sellers on the platform. The DIPP, administrative ministry, responded with these clarifications after complaints by domestic traders that e-Commerce giants are offering heavy discounts using their associates at the marketplace, and requested the government for a level playing field.

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Consumer Protection Act

Another relevant regulatory development was the enactment of the new Consumer Protection Act 2019, which replaced the old Consumer Protection Act 1986 on July 20, 2020. The Act widened the definition of consumer to include online buyers, thus covering e-commerce transactions, introduced a broad definition of unfair trade practices, encompassing sharing of personal information given by the consumer in confidence, and setting up of a Central Consumer Protection Authority (CCPA), with wide powers of enforcement.

The department of consumer affairs has also mandated all e-commerce entities to ensure the mandatory declaration of the country of origin of imported products sold on their site, under the Legal Metrology Act, 2009 and the Legal Metrology (Packaged Commodities) Rules, 2011. A requirement in line with the ‘vocal for local’ and Atmanirbhar Bharat initiatives.

IT Act and the Personal Data Protection Bill

The government enacted the Information Technology Act 2000 (the IT Act) to address the need for a legal framework to formalise the transactions carried out employing electronic means, which was amended in 2008 to cover additional aspects of electronic transactions resulting from the growth of IT sector. However, in July 2017, following a landmark judgment by the Supreme Court of India in KS Puttaswamy vs Union of India, the government appointed a committee of experts for data protection under the chairmanship of Justice BN Srikrishna that submitted its report in July 2018 along with a draft Data Protection Bill.

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In December 2019, the minister of electronics and IT introduced an amended draft of the Personal Data Protection Bill, 2019 (PDP 2019) in the Lok Sabha, which, in addition to personal data and sensitive personal data, also categorises critical personal data that shall only be processed in a server or data centre located in India.

It is always good to have a robust legal framework covering issues like consumer protection and complaint redressal, personal data privacy and protection. These recent regulatory developments combined with investigations on complaints have led to a media debate on whether overlapping business regulations administered by different authorities is detrimental to new technology-driven business having the potential for generating jobs in areas ranging from delivery, logistics, as well as to offer unlimited market access for products of all sectors.

Apart from domestic challenges, there are instances of multilateral and bilateral negotiations for rules facilitating cross-border e-Commerce wherein India declared earlier that the country finds itself unprepared for negotiations.

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Draft e-Commerce policy and stakeholders

The draft e-commerce policy brought out for stakeholder consultations in February 2019 was quite all-inclusive in its coverage of issues. It aimed at encouraging make in India, safeguarding interests of consumers, and leveraging access to data. It also sought to mainstream the segments of the economy, hitherto having limited access to the digital ecosystem (MSMEs, vendors, traders, etc.), by empowering them through skilling and providing institutional support. The objectives of the policy were familiarising domestic players with technology, enabling them to be sustainable in the digital economy, and stimulating the participation of micro, small and medium enterprises, start-ups and traders in the digital economy.

The draft National e-Commerce Policy aimed to addressing concerns that go far beyond just sale and purchase of products by electronic means. It seeks to address issues broadly touching the aspects of the digital economy such as data privacy and protection, secured payments/ transactions, liability of social media platforms, and standards for smart devices and IoT devices. Unfortunately, even after two years of the release of the first draft, the finalisation of the National e-Commerce Policy is uncertain.

The draft policy is tougher for foreign companies in terms of foreign investment being restricted in the marketplace model of the e-Commerce platform, and regulations concerning data storage and its processing.

Traders’ association CAIT representing kirana shops has emphasized the need for a robust and well-defined policy so that small businesses do not suffer at the hands of large e-commerce firms having deep pockets and enormous resources. CAIT has also demanded the formation of a regulatory authority for monitoring e-commerce businesses with powers to penalise offenders of the proposed e-commerce rules.

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European Union’s e-Commerce rules

The European Commission (EU) announced a robust data protection regime under the General Data Protection Regulation(GDPR). It has taken a lead by proposing a new set of rules, the Digital Markets Act (DMA), for the consideration of the European legislature on December 15, 2020, in an attempt to create a fair e-business environment. The proposed DMA will only apply to the providers of those digital services that are designated to be gatekeepers, based on specified quantitative thresholds and aims at preventing large companies from abusing their market power.

The draft identifies 10-15 global digital platforms including Google, Apple, Facebook, Amazon, and Microsoft as gatekeepers. The scope of the legislation is also limited to a closed list of eight types of digital services like Amazon marketplace, Google/ Apple app stores, search engines such as Google Search, and social networks such as Facebook. The draft mentions that a small number of large providers of core platform services have emerged with considerable economic power and an ability to connect many business users with end-users, permitting them to leverage their advantages, such as their access to large amounts of data.

Acknowledging the rapidly changing and complex technical nature of core platform services and, the DMA emphasizes the need for a regular review of the status of the gatekeepers to examine whether those designated should continue to be considered as gatekeepers or any new providers satisfy the requirements and ought to be designated as gatekeepers. At the same time, to provide all of the market participants including the gatekeepers, a time limit for such regular reviews is also suggested.

If a gatekeeper does not comply with the rules, the Commission can impose fines of up to 10% of the company’s total worldwide annual turnover and periodic penalty payments of up to 5% of the company’s total worldwide annual turnover, similar to the penalties available in competition cases.

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Accordingly, two pieces of draft legislation as part of the digital services package to address changes and the challenges, particularly concerning online intermediaries, are under consideration in EU Parliament.

  • The Digital Services Act (DSA) seeks to establish a common set of regulatory responsibilities for providers of online intermediary services (social networks or marketplaces).
  • The Digital Markets Act (DMA) establishing rules for large online platforms that are designated as gatekeepers to ensure that markets remain fair and competitive and promote SMEs and other new entrants.

The need for the digital services package has arisen for primarily two admissions. First, much has changed in terms of technology driven transactions since the adoption of the EU e-Commerce Directive in the year 2000. The second, competition policy and its rules are not sufficient to deal with the problems arising from the anti-competitive behavior of companies in the digitised world. The DSA will address these changes and the challenges that have come with them, particularly with online intermediaries.

On February 25, the government of India notified the Intermediary Guidelines and Digital Media Ethics Code under the Information Technology Act, 2000. The code is designed to curb misuse of social media platforms, and requires WhatsApp, Facebook, Twitter, and other social media firms as well as streaming services such as Netflix, YouTube, and Amazon Prime Video to establish a grievance redressal mechanism for their users, disclose the first originator of the mischievous information, and remove objectionable content within a specific time frame.

The reasons behind stipulating strict rules cited are a persistent spread of fake news, rampant abuse of social media threatening the dignity of women, corporate rivalries in a blatantly unethical manner, blatant disrespect to religious sentiments. Among other things, the rules classify some social media intermediaries into significant social media intermediaries, based on the number of users and subjects them to additional due diligence. The threshold number for being a significant social media intermediary has not been specified yet.

The significant social media seems a classification on the lines of gatekeepers under the EU DMA Act. However, the coverage of Intermediary Guidelines and Digital Media Ethics Code has limited scope as it seeks to curb publication and spread of objectionable content on social media platforms.

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Need for a comprehensive e-Commerce policy

As the sector has huge growth potential with Amazon, Walmart-controlled Flipkart, Reliance, and Tata have big plans in the market. It has become a necessary to regulate the sector, keeping in mind the interest of both companies and consumers. A conducive environment and a level-playing field need to be created to foster the growth of SMEs and start-ups with an all-inclusive approach. “Issues related to e-commerce must now be addressed on priority and in a way that the pace of growth in the sector does not lag while the domestic stakeholders, as well as the entire population, is benefitted by the positive spillovers,” says the draft policy.

While scanning the news reports on e-Commerce policy and related developments, one gets an impression that addressing the concerns raised by traders against alleged unfair business practices like predatory pricing, deep discounting, loss funding by giant e-Commerce companies is the predominant issue for the policymakers. However, it cannot be ignored that e-commerce supported by the growth of the internet and smartphones has revolutionised the shopping habits of Indians by expanding the choice of products and services.

The online shopping experience also saves time as it happens at mere click of the mouse. Moreover, at the other end of the supply chain are several manufacturers and merchants in far-flung areas who can find customers miles away using the internet. The gains to the national economy from the evolution of e-Commerce sector are evident.

A comprehensive policy document is a formal declaration of objectives and measures the government proposes to put into action to enable stakeholders to fully benefit from the opportunities that would arise with the expansion of the sector. Thus, a policy document helps in achieving consistency, accountability, and clarity in government actions.

A holistic policy often lists out a specific course of action to be taken to realize the objectives of job creation, productivity improvement, and protection of consumer interests. From an investor’s point of view also, an approved policy document ensures stability and predictability in government actions. This is vital in Indian context as foreign investment in e-commerce sector may also bring in new technology to modernise the supply chain and storage facilities.

(Krishna Kumar Sinha is an industrial policy and FDI expert based in New Delhi. His last assignment was as an industrial adviser in the department of industrial policy and promotion, DIPP, currently known as DPIIT, under the ministry of commerce.)

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