In June 2021, the Department of Consumer Affairs released a draft set of rules that aims to tighten the governance of ecommerce platforms (‘platforms’). The reactions were instant and vociferous. The supporters (such as trader associations) celebrated the proposal and wished it had come earlier.

The detractors (e-commerce firms, VCs and industry bodies) claim that the rules will impact the ease-of-doing business, innovation and FDI enthusiasm. Interestingly, other ministries in the government (e.g., Corporate law and Finance) also objected for various reasons.

Yes, one of the primary motivations of this proposal is political — to appease the trader lobby. But, even in this politically charged environment, let’s not lose focus of the positive elements. Western nations such as the US should have looked at similar rules decades ago to check the unfettered power of e-commerce platforms. A problem that they are desperately trying to solve today.

The proposal has several good and not so good aspects.

The Good: It’s all about info

The strongest element is that of information provision — Firms are expected to provide clear information regarding product details, photos, returns and exchange rules, modes of payment, grievance redressal mechanisms, etc. A related point is to set up clear grievance redressal mechanisms including nodal officers, timeframes and processes. This is a positive outcome for the consumers since good/transparent information and frictionless pre- and post- purchase processing are keys to a healthy e-commerce market.

Platforms are required to open up the details of the sellers (name, location, contact details, etc). This is good since buyers can now decide to do business with sellers beyond a platform (if they wish to). Seller welfare is as important as consumer welfare. Research across the globe shows when transacting through platforms, sellers lose out on developing relationships with end buyers (due to the opacity mandated by platforms).

This makes platforms unduly powerful to a point where they can impose unfair business terms and excessive commissions or fees. Majority of the sellers on e-commerce marketplaces, research shows, barely make any profit given the extent of services they have to avail to be visible to end consumers (e.g., keyword buying, additional advertising).

Platforms cannot use the vast data available to them to gain unfair advantage over sellers or show differential treatment between sellers. This is an important rule that goes a long way in ensuring seller welfare. What is the digital world if not all algorithms?. The opacity of these algorithms creates undue advantage for platforms over both buyers and sellers.

For example, it is commonly acknowledged that search results in Amazon and Flipkart unduly favour related parties or sellers that subscribe to logistics solutions provided by these firms (e.g., Fulfilled by Amazon). Usually, these solutions are incredibly expensive and suck out all the margins from the sellers. However, it remains to be seen how the regulators plan to enforce this rule. It is not an easy task.

The Bad: Over-reach and ambiguity

The proposed rules infringe on other ministries’ mandates. For instance, the ‘fallback-liability’ clause holds platforms liable for any mis-selling by third party sellers. However, this runs counter to the FDI rules of the Finance Ministry — preventing platforms from explicitly managing their inventory.

Further, it takes away the immunity granted specifically to marketplaces under the IT Act. Similarly, the Ministry of Corporate Affairs feels that rules related to the abuse of competitive position are unnecessary since there is already a robust Competition Commission that oversees such issues.

The proposal also refrains related parties from commercial activities on platforms. A related party is any entity with common shareholders of over 5 per cent or more than 10 per cent ownership. While the motivation for this clause is noble, it won’t make any sense from a regulatory perspective.

More importantly, it will choke all types of businesses. For instance, Starbucks, an official partner of Tatas cannot sell coffee on Tata e-commerce app. Such rules are detrimental to business logic, e-commerce or not.

The biggest flashpoint is ‘flash sales’. The proposal effectively bans flash sales — defined as “sale organized by an e-commerce entity at significantly reduced prices, high discounts or any other such promotions….”The Ministry later clarified that it won’t apply to ‘conventional’ flash sales. Several issues at play here. One, it is impossible to delineate a ‘conventional’ flash sale from the ‘undesirable’.

Two, even offline retailers conduct flash sales during festivals or to clear out inventory. Three, consumers benefit immensely from these flash sales via reduced prices and greater choice.

The Missing

The discussion should now turn to how the government can redraft a proposal that enhances the welfare of consumers and small businesses, and yet, does not dampen the enthusiasm in the e-commerce sector. There are certain missing elements that need to be considered:

A definitive structure of the industry is now the requirement. E-commerce is no longer an exotic domain. It is a growing part of commerce in general. To what end are these rules being proposed? Can they also apply to offline retail? For instance, a multi-brand retail store can be treated as similar to a multi-brand e-commerce platform. Is it possible to create categories of firms based on the type of retailing they do (without differentiating between offline and online).

The rules lack nuance. For instance, the proposal must clearly distinguish between an ‘inventory’ platform versus a ‘marketplace’. Some rules such as ‘fallback liability’ are quite appropriate for an inventory model but onerous for a marketplace. Can the Ministry detail out this nuance? It will also help better compliance and enforcement.

The writer is Professor of Marketing & Program Director at School of Management, Mahindra University

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