Draft e-commerce rules and their challenges – Explained, pointwise

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Introduction

The government has proposed changes to the e-commerce rules under the Consumer Protection Act to make the framework under which firms operate more stringent. It comes 11 months after the Government notified the Consumer Protection (E-Commerce) Rules, 2020, The latest proposals aim towards greater compliance and protecting the interests of consumers.

Ministry of Commerce and Industry has earlier released a few sets of rules to govern the e-commerce operators. Now, the new rules are issued by the Consumer Affairs ministry to deal with ‘unfair’ trade practices that hurt customers.

Several proposals in the draft e-commerce rules are aimed at increasing liabilities for online retailers. Major industry bodies, including the Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce & Industry (FICCI) are expected to hold meetings with e-commerce firms and other stakeholders, to discuss amendments to the e-commerce rules.

About the Draft E-commerce rules
  1. Mandatory registration for e-commerce entities: Any online retailer will first have to register itself with the Department of Promotion for Industry and Internal Trade (DPIIT).
  2. Appointing a chief compliance officer.
  3. A nodal contact person for 24×7 coordination with law enforcement agencies,
  4. Requiring e-commerce entities offering imported goods or services to ‘incorporate a filter mechanism to identify goods based on country of origin
  5. Suggest alternatives to ensure a fair opportunity to domestic goods’.
  6. Specific flash sales or back-to-back sales “which limit customer choice, increase prices and prevents a level playing field are not allowed”.
    • Govt will not seek disclosure of other flash sales from e-commerce companies
  7. All e-commerce entities must provide information within 72 hours on any request made by an authorised government agency, probing any breach of the law including cybersecurity issues.
  8. Introduced the concept of “fall-back liability”: The rules made the e-commerce firms liable in case a seller on their platform fails to deliver goods or services due to negligent conduct, which causes loss to the customer.

According to the proposed rules, the consumer affairs ministry is planning fresh guidelines for e-commerce companies, including the appointment of a chief compliance officer, etc.

Need for the draft e-commerce rules
  • Uncompetitive trade practices: The two large e-commerce players(Amazon and Flipkart) have been contending with accusations that their pricing practices are skewed to favor select sellers on their platforms and that their discounting policies have hurt offline retailers. Further, The Competition Commission of India wants to conduct antitrust probes to investigate business practices (Amazon and Flipkart).
    • The Media investigations suggest this to be the case: Internal documents from Amazon, for instance, showed that just 35 of the 400,000-odd sellers on its platform account for two-thirds of sales, suggesting that it extends preferential treatment to a handful of sellers.
    • The e-commerce platforms are both players and regulators, as they provide the marketplace and also compete directly with other sellers using it. This creates a conflict of interest. 
Advantages of the draft e-commerce rules
  1. Equal protection to all:
    • The rules restrict e-commerce companies from “manipulating search results or search indexes”. It is a long-standing demand from sellers and traders to prevent preferential treatment to certain platforms.
    • Further, the rules also mandate the logistics service provider to not provide differentiated treatment between sellers of the same category.
    • The rules also protect against unfair trade practices and also against misleading advertising.
  2. Push for made-in-India products: The e-commerce companies will have to provide domestic alternatives to imported goods. This will boost made-in-India goods.
  3. Lead to more accountability: The proposed amendments will lead to more accountability from stakeholders of e-commerce firms. The e-commerce companies need to provide an explanation on how they rank the products, which consumers can understand easily, and also create transparency.
  4. Weed out fly-by-night operators: With mandatory registration for e-tailers with DPIIT, the fraudulent e-commerce operators can be tackled.
Challenges with the draft e-commerce rules:

Challenges with the draft e-commerce rules

  1. Greater oversight over all online platforms: Following on the heels of the recent IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, the draft e-commerce amendments show the Government’s increasing enthusiasm to exercise greater oversight over all online platforms.
  2. Cannot sell retail products of their own: The new rules mention “none of an e-commerce entity’s ‘related parties and associated enterprises is enlisted as a seller for sale to consumers directly”. This impacts several platforms that retail products supplied by vendors with arm’s length ties.
    • Any entity having 10 percent or more common ultimate beneficial ownership will be considered an “associated enterprise” of an e-commerce platform
    • However, this would not only affect the business operations of Amazon and Flipkart, but even domestic players like Tata and Reliance would find it difficult to integrate multiple brands and sell their products through super apps.
  3. Legal challenges overburden Judiciary: The enforcement of many of these norms is bound to spur extended legal fights. This will overburden the Judiciary.
    • The rules will open the door to subjective government intervention. For instance, flash sales are prohibited if they are back-to-back and limit customer choice. The decision on whether a sale violates these terms remains vulnerable to regulatory interpretation.
  4. Impact on growth and job creation: The new e-commerce rules create over-regulation, along with a scope for interpretative ambiguity in rules. This will retard growth and job creation in the hitherto expanding e-commerce sector.
  5. Discourage MSMEs: E-commerce also has provided MSMEs with a wider audience to sell their products. Tightening of rules for marketplaces will discourage these MSMEs from coming online.
  6. Deprive the strategic autonomy: The proposed draft rules look like a manual for micro-management of e-commerce companies like pre-1991 Licence Raj. Further, If all e-com websites are forced as generic market platforms, these companies could lose their ability to outperform rivals and serve the market’s ultimate cause.
    • These rules appear to be catering to traditional retailers, who have been increasingly unhappy with the huge success of deep discount festive-season flash sales on Amazon and Flipkart.
  7. Contradiction with Commerce and Industry Ministry rules:
    • The new draft rules said no related parties and associated enterprises should be listed as sellers on marketplaces. On the other hand, the Commerce ministry rules forced companies like Amazon to bring down their shareholding in what they called preferred sellers to 24%. This was done to provide a more level playing field among sellers. This creates confusion on the rules.
  8. Other issues:
    • It is not clear, how identifying goods based on “country of origin” will offer domestic manufacturers a better deal unless it is assumed that consumers are driven by patriotism rather than value.
    • Unlike the last set of rules issued by the commerce ministry, this draft doesn’t distinguish between foreign and domestic e-commerce.
Conclusion
  1. Appoint a single nodal agency: The government needs to remove ambiguities that arise from multiple ministries governing the e-commerce sector. So, the government needs to appoint a single nodal agency and streamline rules for online marketplaces.
  2. Need final laws: Until the government doesn’t come with final laws to govern the sector, e-commerce companies will continue to create more structures and build complicated supply chains to evade the current norm. 

The new rules will only create a new set of problems and possibly give support to some inefficient competitors. So, the new draft rules need a relook.

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