Very recently the government, more accurately the Department of Consumer Affairs (DCA) released the draft amendments (Draft Rules) to the Consumer Protection (e-Commerce) Rules, 2020. The Draft Rules actually took the industry by surprise as it contained provisions that were clearly not for the benefit of the consumer. The consultation process that this has set -off will obviously see protests from the incumbents of the e-commerce industry as well as smaller players who will also be impacted if the Draft Rules come into force in its current form.
The e-commerce space has proliferated in recent years and it is a known fact that the two large marketplace platforms have the lion’s share of the B2C e-commerce space. Starting with IRCTC an e-ticketing marketplace for the Indian railways, as internet penetration grew we saw the arrival of Flipkart and Amazon. In the recent past this space has exploded no thanks to Reliance Jio and affordable data in the hands of the great Indian middle class. Foreign direct investment (FDI) related reforms in the e-commerce space which allows for 100% foreign shareholding in B2C marketplace entities, albeit certain conditions.
The story of e-commerce in Indian is similar to growth stories in other sectors. An industry grows rapidly when it spawns out and is eventually reigned in by regulators once they get too big (what is considered too big is obviously relative). This can be compared to the situation in the US where the congress is cracking down on big tech. The House of Representatives, the lower house of the country’s legislative branch, has introduced a number of bills to reign in big tech. This is the first serious attempt by the US government to control and curtail the power of large tech companies like Google and Apple, and notably, Amazon. The bills have been cleared by the Judiciary Committee and will soon be put to a vote. The Ken has published a great article on this - you can find it here.
While the US bills are designed for the big tech, the Draft Rules in its current form will apply to every e-commerce entity, single brand, marketplace or inventory based. While some compliance requirements may be to target the incumbents, in practice most of the provisions are equally applicable to your local computer hardware store who has decided to put up a website to sell its products.
Also, allegations have been made regarding regulatory overreach. In this post we will see how this will impact all e-commerce players and verify the other allegations. Without going into each provision, I have outlined the issues broadly below.
Scope of the rules
The major concern with respect to the Draft Rules is that it goes beyond the objective of the Consumer Protection Act, 2019 (CPA). A delegated legislation of this nature cannot go beyond the scope of the parent act, which it derives its powers from. This leaves the draft prone to constitutional challenges if enacted in its current form.
Below are some examples:
Inclusion of related parties and associated entities
The Draft Rules broaden the definition of e-commerce entities to any related party which can be a holding, subsidiary or an associate company. Even non e-commerce entities who will not be carrying out any such activity relating to e-commerce such as manufacturing entities or logistics players will be included within the ambit of the definition under the Draft Rules. It is not possible for such companies to comply with several provisions of Draft Rules that are aimed at e-commerce platforms.
Logistics Service Providers
The Rules also provide for a definition of logistics service provider and require such entities to display the terms and conditions that governs its relationship with the sellers on the e-commerce marketplace platform. Logistic service providers provide B2B services and any B2B service is outside the ambit of the CPA. This is one of the many provisions under the Draft Rules that reek of overreach.
You may have heard the about all the confusion that this particular provision has caused. The DCA had to release a clarification to make it clear what kind of flash sales it applies to. Despite the clarification that the provision is not intended to ban all flash sales, the provision lacks clarity. Also, I myself find flash sales to be beneficial to me as a consumer in terms of the reduced prices it offers. The introduction of this provision runs counter to the objective of the CPA i.e. to benefit the consumer. Further, for the inventory model of e-commerce, the seller (operating its own platform) may want to promote its products and there is no basis for restricting the same. If the intention was to cover unfair trade practice, this is appropriately covered under the CPA read with the existing rules.
Within the scope of other laws
There are a whole host of subject matters that do not come under the ambit of consumer protection and squarely fall within the domain of other government bodies and enactments.
The prime example of this is the provision regarding the abuse of dominant position by an e-commerce entity. This is clearly within the domain of the Competition Commission of India (CCI). If this was included to target the might of the e-commerce duopoly, that is Amazon and Flipkart, this is best left to the CCI.
Next is the issue with the requirement to display the country of origin for products on a marketplace. This has been traditionally the job of the seller under the Legal Metrology (Packaged Commodities) Rules, 2011 (as amended) which has requirements for stating (i) the best before or use by date where applicable or where the commodity can become unfit for human consumption after a period of time; (ii) the name of the country of origin or manufacture must be mentioned in the package in case of imported products.
In any case, the marketplace does not comply with such requirements and this lies on the seller/ manufacturer. More importantly, the marketplace entity often does not interact with the goods/ services being sold on it.
The Draft Rules also has provisions for appointing chief compliance office, nodal contact person and resident grievance officer. It requires e-commerce entities to provide information to the government and other enforcement agencies. A marketplace e-commerce entity is an intermediary and is required to comply with very similar requirements under the newly passed Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021. Further, the CPA does not envisage appointment if such officers.
Next we have to talk about fall-back liability. The Draft Rules require that marketplace e-commerce entities be subject to a fall-back liability if a seller registered on its platform fails to deliver the goods or services ordered by a consumer due to negligent actions of the seller in fulfilling duties and liabilities in the manner as prescribed by the marketplace e-commerce entity which causes loss to the consumer. This is unreasonable as marketplace e-commerce entities do not have operational control over the sellers' activities or over their quality of services. Moreover, for marketplace entities such a requirement is contradictory since marketplace e-commerce entities are not, in the first place, supposed to provide warranties/guarantees on behalf of any seller as per the requirements of the NDI Rules. Liability imposed on marketplace entities for default of third-party sellers will contradict the requirements under the NDI Rules.
Consumer reforms are generally welcome, the current draft goes way beyond that. The Draft Rules impact India’s ease of doing business score and set us back by a few years. The government must keep in mind that e-commerce penetration is still under 10% when it comes to the retail market. The rules seem to have been lobbied by the confederation of all India Traders (CAIT). But, the government has to keep the bigger picture in mind especially when digitization is the future of retail. E-commerce monopolies can be dealt with under other laws, but as the Draft Rules currently stand, it impacts even your local baker selling through his/her website.