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Amazon and Flipkart cannot insist on ecosystem conducive to their interests

The two e-commerce companies have closed ranks in India to take on the Indian government and its marketplace model. The reason for their disenchantment with this model is not far to seek 

June 16, 2021 / 09:05 AM IST

On June 11, the Karnataka High Court dismissed Amazon’s and Flipkart’s writ petitions challenging the probe ordered by the Competition Commission of India (CCI) against their business practices. The CCI had in January 2020 ordered such a probe following a plea in 2019 by the Delhi Vyapar Mahasangh (DVM), a group of owners of several micro, small and medium enterprises (MSMEs) against Flipkart and Amazon for abusing their market dominance and giving preferential listing and deep discounting on products sold by select vendors in which they control indirect stakes. The two e-commerce companies got a stay from the Karnataka High Court in February 2020.

The CCI approached the Supreme Court asking for vacating the stay because an inquiry by itself cannot be prejudicial to the e-commerce firms. The apex court sent the matter back to the Karnataka High Court, which now has given its go-ahead for the probe. Accordingly, the ball is now in the CCI’s court. On June 15, Reuters reported that the antitrust watchdog plans to expedite the probe and demand information from them related to the allegations ‘as quickly as possible’.

The competing duo has closed ranks in India to take on the government and its marketplace model as tightened by further restrictions imposed in February 2019. The 2019 amendment to the Foreign Direct Investment (FDI) guidelines forbids e-commerce platforms from selling products of companies and firms in which they have a stake. Amazon reduced its stake from 49 percent to 24 percent (through an affiliate) in Cloudtail, which accounted for a significant portion of its sales. This is a grudging, half-hearted and partial compliance. What has been rankling the duo equally are the other two restrictions simultaneously ushered in 2019 — a ban on exclusive sales on marketplace platforms, and refraining from price fixation.

The reason for the disenchantment with the Indian marketplace model on the part of Amazon and Flipkart is not far to seek. Back home in the United States, they are accustomed to the liberal inventory model in most of the states that gives them the leeway to do pretty much what they please — buy on their own account, finance their favourites, fix prices, conduct flash and exclusive sales to dispose of stock, etc. India has consciously chosen its obverse, the marketplace model under which the e-commerce firms can only be facilitators and no more.

The duo appear to resent the marketplace model that is stifling their business models. Allowing their group companies and associates to dominate over other small vendors on their portal(s) has been beneficial for the two e-commerce websites, but this has allegedly hurt the small vendors who are unable to match their scale.

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Direct purchases from the manufacturers are the key to success of both Amazon and Wal-Mart in the US. India, where traders play a major role in the system, has disowned the inventory model; though arguably it helps consumers in getting their products cheap. India has chosen the marketplace model so that it is able to balance the concerns of consumers with those of traders.

The final straw in the camel’s back is the annual declaration of compliance an e-commerce portal is now required to furnish every year by September 30 in respect of the financial year ending March 31 — a certificate along with a report of statutory auditor to the Reserve Bank of India (RBI), confirming compliance of the DIPP guidelines on FDI in ecommerce.

What the e-commerce giants are seeking to do is of a piece with what the foreign social media majors such as Twitter and WhatsApp are doing — we want the enormous business opportunities provided by India but not its ‘stifling’ laws.

But then, a firm like Amazon has faced scrutiny elsewhere as well. The company has a history of controversies in other nations — like for example, aggressive tax avoidance in the US. In March, US President Joe Biden singled out Amazon for avoiding tax. He said Amazon was one of 91 Fortune 500 companies that “use various loopholes where they pay not a single solitary penny in federal income tax”, in sharp contrast to middle class families paying over 20 percent tax rates.

In November, the European Commission too called out Amazon’s duplicity in misusing the marketplace model to foster its own business interests by patronising its own chosen sellers.

In a few states in the US like California and Washington where the marketplace model prevails, Amazon has attracted anti-trust probes for the same reasons as in India.

In challenging the CCI probe, Amazon and Flipkart are resorting to grandstanding or a pre-emptive strike to tell the outside world that there is no freedom of doing business in India; whereas the truth is a foreign company cannot insist on an ecosystem that is conducive to its interest. It has to abide by the law of the land where it operates — period.

Disclosure: Moneycontrol is part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

 
S Murlidharan is a chartered accountant and columnist. Views are personal.
first published: Jun 16, 2021 08:33 am

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