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COMMENTS ON THE DRAFT E COMMERCE POLICY: CAIT

  1. The present representation of the Confederation of All India Traders (“CAIT”) is filed with the Hon’ble Ministry of Commerce and Industry with the request for identifying and empowering a regulatory authority with the mandate to enforce the provisions and intendments of the Draft National E-Commerce Policy (“Draft Policy”) as well as the extant law on ecommerce being governed through, inter alia, Paragraph 5.2.15.2 of Press Note 2018. Specifically, CAIT wishes to stress upon the dire need for a judicial or quasi-judicial authority having enforcement as well as adjudicatory powers to give effect to the prevailing e-commerce policy in India. CAIT, at the very outset, lauds that the draft e commerce policy identifies all issues that are faced with this sector like immense capital dumping, loss selling etc which needs to be curbed. However, not having a regulator/ judicial/ quasi judicial authority like we have in other jurisdiction, would render this policy framework as a paper / toothless tiger.
  1. This representation comes in response to the call for stakeholder comments on the recently published Draft Policy that seeks to enable stakeholders to fully benefit from the opportunities that are borne out of the domestic economy which increasingly being digitized.
  1. At the outset, it is submitted that the Draft Policy released by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry are a welcome step in the right direction in order to ensure that regulations made in this sector are not contravened, or otherwise circumvented by the dominant e-commerce players.
  1. However, while there is an express recognition for the need of progressive steps that must be taken to ensure that pertinent issues at stake in this sector including competition concerns, consumer interests as well as broader economic and social interests of the nation are addressed through appropriate regulatory response, much more is desired on the actual enforcement aspect of the policy. To that end, CAIT, being a body that advocates for the interests of more than 6 core traders including numerous micro, small and medium enterprises (“MSMEs”) is an essential stakeholder and has a direct interest in effecting positive regulatory changes that can cure the ills that have beset the sector.
  1. In this light, CAIT submits the following comments on the Draft Policy and crave leave to make further representations in the future in order to assist the Ministry and request for an effective e-commerce regulator/ judicial / quasi judicial body armed with extensive enforcement powers.
  1. The stipulations contained in the Draft Policy are an express recognition of the imbalance in the interaction between the various stakeholders in the online economy, such as MSMEs, start-ups and even consumers, with large entities who have been operating in the sector for sometime, such as Amazon, Flipkart (now with Wal-mart) and Paytm Mall, to name a few. While the Policy recognizes the need for regulatory response and the need for equipping the current enforcement structures to tackle issues emanating from the e-commerce sector, the Policy essentially sets up a tooth-less tiger in making positive regulatory changes without having an enforcement mechanism for the same. The query which needs to be posed is: why hasn’t the objective as evidenced under the letter and spirit under the FDI policy being accomplished. The only response CAIT fears that the outcome of the policy without a regulator would be very much akin to the MRTP Commission which was often dubbed as a toothless tiger since the MRTP Act had no enforcement powers.
  1. In this context, it may be noted that regulations have attempted to tackle the problems of circumvention with clarifications, such as in the instance of releasing Press Note 2 which effectively made welcome regulatory changes to the extant FDI Policy in order to tackle some of the concerns that were faced by key stakeholders, including CAIT, in the economy. However, the ‘Achilles Heel’, so to say, for the regulation of the e-commerce sector has never been a lack of legislation, but rather a lack of enforcement of the existing legislation. As such, CAIT has made elaborate submissions earlier to the Ministry to show that the dominant e commerce companies have flouted, rather nonchalantly, FDI policies since a long period of time. This has been the case because of lack of an effective regulator.
  1. The CCI has had occasion to deal with some cases in this sector till date. In the recent order under Section 31(1) of the Competition Act, 2002, while approving the acquisition of a majority stake in Flipkart Private Limited by Wal-mart International Holdings Inc., the CCI has taken note of the allegations of predatory pricing and Flipkart’s nexus with some preferential sellers on is platform as recorded in the judgment of the Income Tax Appellate Tribunal in Flipkart India Private Limited v. Assistant Commissioner of Income-Tax [ITA No.693/Bang/2018 (Asst. Year – 2015-16)]  but has restrained itself from undertaking an analysis of the anti-competitive effects of such conduct.
  1. The CCI, while expressly stating that concerns regarding preferential listing and deep discounting may merit examination from the point of view of Section 3(4) of the Competition Act, 2002, has erroneously observed that these are issues that fall outside the scope of the Act on account of being part of the FDI Policy, the enforcement of which is entrusted with authorities established under the Foreign Exchange Management Act, 1999. Thus, the CCI has refrained from using its suo motu powers to initiate action against potentially anti-competitive conduct and instead acknowledged the need for appropriate regulatory intervention for contraventions of the FDI policy.
  1. Despite there being no provision for giving information / filing a private complaint to the Directorate of Enforcement regarding the contravention of the FDI Policy, CAIT has also given information regarding all the contraventions and circumventions of the extant FDI Policy by Flipkart, but the ED has failed to take cognizance of the matter. Without proper redressal mechanism for relevant stakeholders in case of e-commerce specific disputes, the aggrieved party has therefore been left without any remedy, despite clear evidence of FDI violations. In this regard, it may also be noted that show cause notices, with fines of hefty amounts, have been issued against e-commerce entities in the past by the ED. However, not a single matter has been determined to its conclusion where such FDI violations have resulted in adverse orders being passed by the authority against violating parties. The Draft Policy too has observed the lopsided benefits in the market as it observes that it is not the e-commerce entities themselves, but rather a few shareholders that prosper and make huge profits. In essence, entities like Flipkart, touted as the unicorn of Indian start-ups, becomes little more than an engine to generate profit for its shareholders such as TigerCent, Softbank and other large foreign investors. In some sense, therefore, there has been a theft or leak of the benefits that should have emanated from allowing 100% FDI in the B2B e-commerce space that the ED has been wholly inefficient to stop.
  1. Under such conditions, it can be seen that either there is reluctance for regulatory intervention by enforcement authorities that are empowered under the respective statutes or such enforcement authorities are not equipped to appreciate and analyse e-commerce transactions that have the ability to prejudicially and adversely affect key stakeholders such as MSMEs and other start-ups, as well as consumers in the long term. The Draft Policy recognizes the regulatory reluctance to act in face of the changing nature of the e-commerce sector as it goes on to state that “authorities are expected to be aware of these changes and it is expected that policy responses are prompt to ensure that the spirit behind policies is not violated.” However, the Policy does not do justice to enforcement of the e-commerce policy. One of the solutions identified by the Draft Policy, for instance, has been the setting of the Standing Group of Secretaries on e-commerce (SGoS) as a body to recommend policy changes. What has completely been overlooked, however, is that while the SGoS can recommend policy changes to meet the transient nature of the e-commerce sector as it stands currently, the SGoS would never be in a position to actually enforce any policy that is either a realization of the policy contained in the Draft Policy or the extant policy contained in Press Note 2, amongst other legislations that can affect or are affected by e-commerce transactions (including but not limited to laws relating to Intellectual Property Rights, Consumer Laws, Information technology laws and competition law). SGoS would not be a regulator / quasi judicial body to enforce the policy. The policy also recognizes that license of the non complaint e commerce player would be taken away, the question is which body / authority would decide that the e commerce players are not adhering to the policy?
  1. As pointed out above, the experience with various regulatory authorities under the current regime in India, be it the Enforcement Directorate or the Competition Commission of India has only resulted in inaction. However, similar issues have been dealt with differently in more mature jurisdictions and the current Draft Policy, equipped with the benefit of hindsight obtained from the regulatory experience in these jurisdictions, has the ability to fill in the vacuum that is left in the actual enforcement of an ecommerce policy by making appropriate amendments. Adopting a pragmatic approach in the sphere of policy intervention would therefore entail that, e-commerce policy in its final recommendation, provides the way for a judicial or quasi-judicial body, having the trappings of a court, and mandated to look into infringement actions brought against, as well as by, e-commerce entities.
  1. While the Draft Policy addresses many concerns that arise (or are bound to arise) in the sector, much of the Policy reiterates the importance of adhering to the extant FDI Policy and the ideals it was designed to achieve. For instance, the Draft Policy reaffirms the importance of maintaining a level playing field and not indulge in practices that lead to distortions in the market; not indulging in capital dumping and loss selling, mandating marketplaces to display the contact details of sellers to maintain transparency in transactions, etc. It becomes relevant to point out that much of these policy intendments were abundantly clear in the Consolidated FDI Policy of 2017, i.e., even before Press Note 2 was released. In this regard, the deficiencies were never felt so much in the enactment of new policies or rules as they were apparent in the enforcement mechanism. A law is only as good as the enforcement structure that supports it, and in the absence of any judicial response from regulators that are awake to the continuous contravention or circumvention that is being affected perpetually, the Consolidated FDI Policy, the subsequent Press Note 2 and all policies that follow suit, including the current Draft Policy, would meet the same fate of having a “policy without a police”.
  1. CAIT, on behalf of the millions of traders that it represents, has made multiple representations in the past and has been a concerned and active stakeholder participating in the discourse that has helped shape the regulatory regime in this sector and has been at the forefront at facing adverse implications that have stemmed from non-adherence to the extant FDI policy. In this regard, the tangible contributions of CAIT in shaping the current discourse has been illustrated by way of the following table. It may be noted that CAIT has strived to bring the following concerns to the notice of the Hon’ble Ministry in the past, which have also been duly considered.
Points put forward by in representations made by CAIT Corresponding Reflections in the Draft Policy
E-commerce, as a sector, is growing at an exponential rate in India. To highlight such growth in numbers, CAIT took support of the figures mentioned in the report released by the India Brand Equity Foundation on the growth of e-commerce, released in October, 2018.

 

CAIT pointed out that majority of the growth and success of e-commerce can be attributed to innovation stemming from increased dependence and priority accorded to value-driven data and network effects resulting from positive feedback loops.

 

In particular, CAIT had explicitly pointed out the operation of network effects in the market in favour of incumbents with not only access to vast swathes of data, but the requisite resources to process and monetize such data either through coming up with products in high-demand or through targeting relevant customers in reference to the recent merger between e-commerce giants Flipkart and Wal-mart, which was subsequently approved by the Competition Commission of India.

 

 

The Policy highlights the growth of the Indian e-commerce sector, and in fact cites the very same report of the India Equity Brand Foundation that was relied upon by CAIT in multiple representations made before the Ministry to underscore the growth of the ecommerce sector in India at Point 2 of Page 4 of the Draft Policy;

 

The Draft Policy underscores the importance of network effects and goes on to recognize how few companies dominate the digital economy and exploit the benefits flowing from the access to vast swathes of data. Indeed, the Draft Policy goes on to state the problem in the following terms at Page 6 of the Draft Policy: “Once a certain scale is reached, it becomes virtually impossible for the ‘second mover’ , on its own to, make an entry in this ecosystem”;

 

The Policy has taken note of the contribution of network effects in determining success of an e-commerce player, at Page 13 of the Draft, since “the presence of ‘network effects’ means that in the era of data, the larger the firm, the greater the access to potential sources of data and greater the likelihood of its success

 

The Draft Policy has also recognized the adverse effects of network effects in creating high barriers to entry and strengthening the incumbents’ position in the market specifically from a competition point of view at Point 4.7 on Page 26 of the Draft Policy wherein stress has been laid on network effects as a factor while analysing mergers and acquisitions.

In its earlier representations, CAIT had continued to stress upon the importance of disruptive innovations being met by appropriate policy and regulatory response to ensure operation of these innovations towards tangible benefits for the economy. In particular, CAIT pointed at regulatory reluctance to look at the adverse effects stemming from practices such as deep discounting and preferential listing of products on the apparent marketplaces; practices which were expressly barred under the extant FDI Policy on e-commerce and gave rise to serious competition concerns.

 

CAIT continued to point out that such practices of large e-commerce players continued to circumvent the extant FDI Policy which also gave rise to competition concerns. However, nether the Directorate of Enforcement, nor the Competition Commission of India

 

The Draft Policy has recognized that the current wave of growth of e-commerce has come at a steep price, i.e., of witnessing “large scale capital dumping by enterprises with deep pockets, to finance sustained selling at losses, which threatened the existence of small businesses”.

 

The deficiencies in the current enforcement structure, as highlighted by CAIT, has also been acknowledged by the Policy in the following terms at Page 13 of the Draft: “Traditional regulation methods struggled to check such occurrences. Larger enterprises consolidated gains, becoming yet larger. Size itself emerged as a market barrier.  Therefore, expectations that the internet would minimize inequality by providing uniform access and would contribute to achievement of development objectives were not met.

 

The requirement for the enforcement authorities to take cognizance of serious concerns arising int heir respective domains, be it the violation of the Competition Act, 2002 or the FEMA, 1999 was also highlighted at Page 25, Point 4.1 of the Draft Policy int eh following terms: “With the constant evolution of digital economy, the nature of regulatory challenges also changes. The authorities are, therefore, expected to be aware of these changes and it is expected that policy responses are prompt to ensure that the spirit behind policies is not violated.

 

The problem of deep discounting as a factor that has raised competition concerns while also being in contravention of the extant FDI Policy has formed the basis of many representations by CAIT, and also addressed by the Policy at Point 4.8 on Page 26 of the Draft.

CAIT has made sufficient representations to show that Flipkart-Wal-mart; Amazon and other e-commerce entities with no dearth of resources and funding have traditionally engaged in large scale deep discounting which has challenged smaller traditional retail units and MSMEs with not even a fraction of the adaptive capacity of multi-billion dollar firms like Wal-mart and Amazon. In effect, the e-commerce entities have been in continuous violation of the extant FDI Policy and influencing the prices of goods and services through practices of deep discounting funded by large investors. The Policy has, at Page 13 of the Draft, recognized the predatory practices of large e-commerce players with no dearth of capital engaging in “large scale capital dumping, by enterprises with deep pockets, to finance sustained selling at losses, which threatened the existence of small businesses”;

 

In response to the CAIT’s representation highlighting the various ways in which the mandate of the extant FDI Policy to maintain a level playing field is circumvented by e-commerce entities, the Draft Policy, at Page 19, notes that “[T]he FDI Policy in e-commerce has been developed in order to ensure that the marketplace provides a level playing field to all participants, while ensuring that distortionary effects, either through means of price control, inventory or vendor control does not happen”.

 

In particular, Page 19 of the Policy also highlights the emphasis on the need to remedy a situation of “capital dumping”, which must be “strongly discouraged.”

Representations submitted by CAIT in the past have laid extensive emphasis on the need to remedy the situation of preferential listings by ecommerce entities of their related vendors. This is yet another instance of continuous contravention of he extant FDI Policy which has not been enforced with any serious object. The Draft Policy, at Page 20, has recognized the need to curb discriminatory practices of preferential listing of products that adversely affect MSME’s and start-ups, and goes on to state that “[O]nline marketplaces should not adopt business models or strategies which are discriminatory, that is, which favour one or few sellers/traders operating on their platforms over others. MSMEs and start-ups are often not equipped to set up and maintain complex distribution channels and cannot afford the expenditure of a significant marketing campaign. Therefore, FDI policy mandates fair and non-discriminatory treatment of all the stakeholders, including MSMEs and start-ups, operating on a marketplace.”

 

The continuous non-compliance or contraventions of multiple provisions of the extant FDI Policy, as pointed out in various representations made by CAIT, has been recognized by the Draft Policy by the reiteration of the need to comply with the FDI Policy in both letter and spirit. Thus, at Page 20 of the Draft Policy, it is stated, “Other conditions have also been laid down in the FDI policy to provide the framework within which an e-commerce marketplace is to function. It is important to ensure that the letter as well as the spirit of the policy is met.”

  1. As represented above, CAIT has strived to point out the necessary spheres of operation requiring policy intervention. In this regard, the current submissions once again highlight the novel objectives that the Draft Policy, once enacted, would seek to achieve. However, it may be noted that such objectives would remain limited on paper unless realized through an independent, efficacious judicial/quasi-judicial regulator that can enforce such policies and penalize non-compliance.
  1. One of the objectives that the Draft Policy seeks to achieve is to create a facilitative regulatory environment for the growth of the e-commerce sector along with empowering domestic entrepreneurship and encouraging Make in India. Indeed, the policy addresses concerns that relate to consumer protection, data privacy and maintaining a level playing field and takes into account the interests of all relevant stakeholders such as MSMEs, emerging start-ups that attempt to enter the markets as well as the final consumers. However, achieving such ideals would necessarily require a regulator that can enforce the policy at the ground level and swiftly contain any tendency to be non-compliant.
  1. The policy has recognized that the e-commerce sector has been characterized by high rates of innovation, increasing dependence and priority accorded to value-driven data (which may or may not include personal data) as well as the operation of network effects. The Policy has recognized that monetization of data is the new business model adopted by corporations, wherein data is  analysed, processed and utilized. Such a business model purports to establish positive feedback loops and thrive on such successful operation of network effects. The Policy recognizes that a handful of companies have been successful at dominating the digital economy by virtue of the first mover advantage, which has been strengthened by the operation of network effects to such an extent that a second-mover finds it virtually impossible to enter the market. At the same time, the Draft Policy also makes a policy leapfrog in characterizing user data, on the basis of which such successful operation of network effects is predicated, as essentially a collective resource; a resource held by the government in trust, but access to which can be permitted. Indeed, the problem of entry barriers can most adversely affect MSMEs and start-ups operating on low working capitals and devoid of huge adaptive capacities to wait for sectoral indices to tilt in their favour. In such situations, the Draft Policy recommends granting benefits of an infant industry status. However, the Policy stops short of determining what exactly could be such benefits and points towards an approach that facilitates MSMEs and start-ups’ access to data. In such conditions, it would be appropriate for an enforcement authority that can act as a price regulator for access to data especially for such class of entities, without compromising on its efficacy or quality. Even such an approach would require for there to be a regulator that can effectively discharge such functions.
  1. The Draft Policy has laid considerable stress on the importance of data, and rightly so. Data is one of the most (perhaps the most) valuable assets in the digital economy. The Draft Policy clearly recognizes this as it lays emphasis on the many ways that data is used by corporation with the capacity to undertake large scale data analysis to make windfall profits. Thus, it can be observed thatlarge e-commerce entities enjoy unqualified comparative advantage as incumbents in the market who have access to vast swathes of data that new entrants or other competitors may not possess. The value of data collection and processing has been accorded prime importance, particularly in e-commerce giants like Flipkart and Amazon. To put the quality and value of data that corporations amass in perspective, we may refer to an example of a rudimentary processed log that itself provides valuable insight about a user. The table  below illustrates how particular data, procured via passive tracking of the user’s journey on the internet across a webpage can be logged and used to draw inferences and make valuable contributions to effective decision making by a firm :

Log file Component Potential Marketing Application
IP address of the browser making the request; user machine name is not usually recorded Detect at least the Internet Service Provider of the user
Country code and domain name Determine which regions might best be targeted
Hour, minute, and second of the request, in addition to the date and day of the week Determining the web habits of a user , for e.g., late night surfers, etc.
HTTP method of the request; (type of request). Know how requests are most commonly made
Response status with the server; does the user return? Improve the service of the web site
Number of bytes transferred in the transaction Determine files are downloaded more often
Referring URL (from where did the user come?) Determine which on-line ads are most effective
User name, if authorization is required Identify and profile a user 
Type of browser used by visitor Ensure website runs with common browsers
Web pages on the server visited Determining potential interests of the customer
  1. We must remind ourselves, that this is one of the most rudimentary representations of the information that can be gleaned from a users’ web interactions. Large corporations like Flipkart and Amazon with dedicated teams of data scientists have the ability to get information that is exponentially higher in value and more informative of consumption patterns across demographics, an advantage that its competitors in traditional retail, mostly MSME’s and new start-ups, do not share. In order to ensure the establishment of an efficacious regulator, it becomes imperative to sensitize the regulator on such issues. However, establishing a new authority is not the only way a regulator can exercise adjudicatory powers over the Policy. It has been recognized in the Policy that existing regulatory for a may develop their respective “technology wings”. What is thus envisaged under the Policy would require existing enforcement structures to undertake large scale capacity development. Such a process may be inordinately time consuming and may not work well with certain fora like consumer courts, which are already overburdened with a plethora of backlog cases. It may, therefore, be in the interest of economy of time and resources to set up an independent judicial/quasi-judicial authority armed with the mandate to enforce the Draft Policy objectives, and the power to penalize non-compliance.
  1. However, it may also be possible to ensure that the Competition Commission of India undertake capacity building and develop itself as a forum that is sensitized to the nature and needs of disputes arising in the e-commerce sector. Indeed, regulatory practice in the European Union has  shown that a single authority that ensures competition law compliance and looks into its violations is the same body that can undertake a thorough analysis of the issues that relate to the e-commerce sector when such issues also impinge on competition concerns. In this respect, the Draft Policy also lays specific emphasis on the need for policy intervention so that e-commerce entities maintain a level playing field. Further, there are issues in relation to deep discounting that is funded by “large scale capital-dumping” that has the unwanted effect of creating market distortions. The behaviour of e-commerce entities have thus far been shown to have an element of undesirable competitive practices that can be remedied through an appropriately equipped Competition Commission as well.
  1. Whatever be the method of regulation and enforcement, the ground norm underlying the establishment of an adjudicator is to have the mandate to adjudicate upon concerns that emanate from e-commerce transactions so that aggrieved parties are not left without a remedy. Under an effective regulatory setup equipped to handle violations of the policy, the variety of anti-competitive conduct being perpetuated could be effectively tempered. For instance, in Europe, the EC found Google to be abusing its dominance by favourable positioning and display of its own comparison shopping services which had the effect of diverting traffic from other shopping sites. This is indeed analogous to the current situation wherein e-commerce giants Amazon and Flipkart have continually been making preferential listings. The EC’s view on these matters has been discussed in previous representations and the same is not reproduced here for sake of brevity.
  1. In effect, the core submission of the CAIT stands on the point of effective enforcement of the Policy, which is the need of the hour. A policy without an enforcement body trusted with the governance of the e-commerce sector would therefore lead to the same position that the market finds itself in now. The Policy, even as it stands presently after the release of Press Note 2, has the ability to remedy many of the issues that beset the sector. However, large e-commerce entities continue to contravene its provisions, both in letter as well as in spirit in the prevailing circumstances where the current enforcement structures refuse or are reluctant in taking concrete steps to remedy such violations.
  1. In light of the continuing unfair and anti-competitive practices by large e-commerce entities such as Flipkart-Wal-mart, Amazon, Paytm Mall, etc.  to name a few, in blatant violation of the extant FDI Policy as clarified through Press Note 2 of 2018, it is incumbent on this panel to examine the aforesaid submissions and to ensure that a situation of complacent noncompliance by such entities can be remedied through concrete enforcement effected through a judicial or a quasi-judicial body equipped to deal with issues arising in this sector so as to remedy the continued prejudice being faced by small traders, MSMEs as well as start-ups to benefit from an inclusive growth of e-commerce.

(TAC-Economy & Finance -Bureau)

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