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Rarely does a day go by, without the Confederation of All India
Traders (CAIT) or the All India Online Vendors Association (AIOVA),
both powerful trader lobbies, accusing foreign owned e-commerce
entities (such as Amazon and Flipkart) of having used underhanded
means to circumvent the intent of India’s Competition Act and
Foreign Direct Investment policy. The accusations themselves come
with such frequency, that it is surprising that they continue to be
taken seriously by news agencies, as well as the Indian Government.
This speaks to the serious political muscle that these associations
enjoy as a large vote bank, which must be kept happy.
Is it at all possible that in this instance, the focus on these
e-commerce giants is doing the opposite of encouraging free and
fair competition? Does the CCI’s continued concentration on
these e-commerce giants have the propensity to force these already
squeezed businesses to shut shop? Where will this leave the Indian
consumer that has greatly benefited from the marketplace model
during the pandemic? Will it be to the detriment of small
businesses that online e-commerce has purportedly saved during the
pandemic by providing them an outlet to their wares?
Let us consider some of the claims and consequences:
1. Predatory Pricing
One allegation is that these foreign owned ecommerce entities
ensure that goods are priced below cost, with the intention of
bleeding out competitors. Once these competitors have been pushed
out, these e-commerce entities would then raise their prices to
monopoly levels to recoup their losses. There are a few problems
with this assertion:
- For predatory pricing to be an offence, it is necessary for it
to be established that the entity in question is
‘dominant’. Dominance is the ability of an entity to act
independently of market forces. Here, clearly, one can see the
likes of Flipkart and Amazon compete vigorously with each other,
particularly in terms of the offers available during sale
festivals. If either of them is indeed pricing below cost, it is
doing so to meet competition from their biggest rival, rather than
risk becoming irrelevant. - The roundabout argument that pricing below cost is unto itself
an indication that an entity is dominant has previously been
rejected by the CCI in the OLA case.1 - There are multiple instances of new e-commerce entities
entering the market, Nykaa and AJIO spring to mind
immediately. - E-Commerce entities with Foreign Direct Investment (FDI) cannot
price products on the marketplace, nor can they sell directly to
consumers. This is something that was ensured by way of India’s
FDI Policy, specifically by Press Note 2 of 2018 amending
India’s FDI Policy (PN2). - While not a legal argument, but an emotional one – mom and pop
stores have had complete freedom to price how they like, often
where markets are physically delineated. It is no wonder that these
stores are complaining about their margins through trade
associations when prices are lower on online marketplaces.
Overall, the breaking of the monopoly of mom-and-pop stores in
their limited geographies, providing lower prices, a wider range,
while also enabling the convenience of not having to leave the
house during a pandemic in terms of customer benefit should be seen
as far outweighing the need to protect the bottom line of these
stores that have had it all their own way so far.
The claim from trade associations that foreign owned e-commerce
entities are putting small retailers out of business is obviously a
self-defeating one, because it means that they compete, necessarily
making the market not restricted only to e-commerce marketplaces,
and greatly reducing the likelihood that they are dominant in a
market where the vast majority of sales are still made directly
from a local store.
2. Use of Third-Party Seller Data
While the CCI decided not to pursue this in March of 2022
against Amazon, there have been repeated claims/concerns and news
reports raised about the use of third-party seller data to reverse
engineer goods of leading brands and small businesses, thereafter
undercutting them to put them out of business through the
entity’s own ‘private brands’.
This again is a claim that would require ‘dominance’ to
be established. It is understandable if the brands have no choice
but to sell on the marketplace, which is for all practical purposes
an essential facility, but this is clearly not the case. Other than
there being multiple online marketplaces, these brands can, and
often do sell their goods through brick-and-mortar stores, as well
as their own websites.
If it can indeed be established that no dominance exists in
favor of the e-commerce marketplace giants we have mentioned
before, one cannot help but come to the conclusion that the outcome
of the use of data is clearly pro-competitive. These private brands
usually offer a cheaper alternative to branded goods, often aping
the market leader. Consumers then have a choice of buying an
established product at a slightly higher price, or a cheaper
substitute that is designed to do the same job.
Should the branded product have a suitably superior quality, be
suitably differentiated, or be priced suitably reasonably, it is
certain to survive. This is essentially the kind of competition
that the free market predicates.
3. Differential Treatment
This is another area where the lines are extremely blurred
between Competition Law and FDI Policy. Section 4(2) of the
Competition Act 2002 states that a ‘dominant’ party cannot
impose unfair or discriminatory conditions in the sale of services,
here to be read as access to the marketplace. Needless to state
here that the establishment of dominance would be a necessary
criteria for this to even begin to be considered as something that
could potentially fall foul of the Act.
Press Note 2, however requires the e-commerce entity to maintain
a level playing field for its sellers on the platform.
It is notable that Press Note 2 also establishes that an
ecommerce entity with FDI cannot have an ownership interest in
sellers, and cannot dictate prices. Logically thus, what interest
would a marketplace that survives on commissions have to
discriminate against a seller, but based on performance or customer
satisfaction?
It is interesting to note that the Enforcement Directorate, one
of India’s most powerful enforcement agencies, responsible for
enforcing economic laws and a part of the Department of Revenue,
only chose to send a notice to Flipkart and not Amazon for
purported violation of FEMA, asking why a fine to the tune of USD
1.35 Billion should not be imposed.2
It appears that another way to bell the cat has been found here,
where the antitrust challenge was destined to fail.
Analysis
There is little doubt that the overall impact of having Amazon
and Flipkart operate and compete with each other, as well as
disrupt existing supply chains is greatly pro-competitive when
viewed from afar. Availability and customer choice have greatly
improved. Prices and delivery times have nosedived.
Add to this the fact that both provide jobs, either directly or
indirectly to thousands of people, which goes up significantly
during Big Billion Days and the Great India Sale festivals. There
are also multiple instances that can be found on the internet,
whereby Amazon and Flipkart claim to have taken steps such as
waiving listing and onboarding fees and providing working capital
loans to enable small businesses to keep afloat during the
pandemic.
Not for a minute can it be claimed that these organizations act
solely altruistically. Positive media coverage and attention are
nothing but attempts to drive up stock prices and profits. But
where really are these profits? Both Amazon and Flipkart have
reportedly made losses of over 500 and 300 million USD
respectively3. This is without accounting for wholesale
arms of both entities which also make massive losses.
Walmart procured a 77% stake in Flipkart in May of 2018 for USD
16 Billion. This was surely done with the hope that Flipkart would
become profitable at some point in the future, or at least that
Walmart would be able to sell its stake down the line profitably.
Unfortunately for them, later that year, PN2 would come into play
that would cut off one of the avenues to be able to make revenue,
i.e. by selling directly to the customer.
It appears increasingly unlikely that Amazon or Flipkart will
ever be able to turn it around to become profitable, particularly
with mounting legal expenses and the threat of millions being
imposed upon them as a fine.
It will be unfortunate if the myopic protectionist measures to
protect Indian companies leads to a withdrawal of these established
global e-commerce giants.
While active outreach programs that ensure you stay in the news
for all the right reasons e.g. providing jobs, enabling cottage
industries and small Indian businesses succeed will certainly help
stem the tide of popular opinion against the ‘outsiders’,
the importance of visibly and obviously being in compliance cannot
be overstated particularly when it comes to FDI norms and the
Competition Act. Some of the top most priorities should be:
- Training your representatives on what to say, and what to avoid
saying, such as ill-advised boasts about being beyond competition,
including on social media. A tactless statement may seem innocent
enough as mere puffery, but can, and often is used by regulators
against you, and can be quite difficult to overcome. Train
representatives not to publish unsubstantiated reports about your
company on their own personal social media. - Keep in mind that regulatory and enforcement bodies in India
are becoming increasingly sophisticated and cooperative (with each
other). It is important to have a well thought out dawn raid policy
in place, have a process in place to inform suitably appointed
in-house and outside counsel in place to deal with investigation to
ensure investigating authorities have suitable authorization in
place, and do not collect data and information which is beyond
their purview. - Establishing a culture of compliance, ensuring that new
business activities, sales, discounts, exclusivity arrangements,
pricing decisions and advertisements and publicity have been looked
over specifically by counsel from the POV of eliminating what could
be seen as a potential FDI or Competition Act non-compliance.
Having a strong compliance program, and being able to prove a will
to comply with FDI norms and the Competition Act will certainly go
in a company’s favor, and may even be an important factor to be
considered for leniency or clemency. - Staying ahead of the curve may help, e.g. by ensuring your
search algorithms are transparent, putting policies in place that
ensure sellers are treated alike, and that decisions on prices are
taken by sellers alone. It is also extremely important that records
be kept to be able to show these actions in the event of being
questioned by a regulator.
Admittedly, there is no bullet proof solution for safeguarding
investments in an economy where ad-hoc decisions are unfortunately
commonplace. The 4 steps mentioned above however, should go some
way is providing some security to businesses.
Footnotes
1. Refer to paragraph 97 of Fast
Track Call Cab Pvt. Ltd and Anr. Vs. ANI Technologies Pvt. Ltd. (6
of 2015)
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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