Amazon, Flipkart face risk of being legally exposed in India

Learnings from the past

Amazon has been regularly attracting regulatory skirmishes. For instance, in the previous decade it was reportedly sealing deals with leading book publishers across the world to control e-book prices. When it smashed against the book market in the United States through Kindle, leading publishers felt the brunt and entered into agency agreements with Apple to better control prices in the online market.

Vide the agency agreement, Apple reportedly received a 30 percent commission on the price of every e-book, and interestingly Apple found favourable treatment from the publishers to secure its interests by ensuring that if e-books were sold through other distribution channels, their prices could not be lower than the prices for those titles in Apple’s iBookstore.

Amazon was then compelled to give in to such agency arrangements, but shortly thereafter it wrote to the Federal Trade Commission leading to investigations against Apple and the publishers. This led to the finding from the US District Court for the Southern District of New York that while it may be legal for agreements to comprise favourable treatment clauses, price caps, or pricing tiers, it will be illegal to use those business practices to effect an unreasonable restraint of trade.

With the above win, Amazon was able to influence publishers into subsidising e-book prices to ensure a steady flow of inventory for Kindle and by the time technology opened up for enabling e-books to be read on other devices, the market had largely been captured by Amazon with predatory pricing.

On the EU Side

While in the US, Amazon was the informant, its brushes with anti-trust regulators in the European Union (EU) over e-book markets saw the Competition DG initiate investigations in June 2015; this time for Amazon’s ‘parity clauses’.

Amazon used numerous variants of parity clauses to derive a beneficial position if the e-book suppliers chose to make the e-book available through any e-book supplier other than Amazon. The parity clauses — in the words of the European Commission — “require E-book suppliers (i) to notify Amazon of more favorable or alternative terms and conditions they offer elsewhere and/or (ii) to make available to Amazon terms and conditions which directly or indirectly depend on the terms and conditions offered to another E-book Retailer.”

Amazon had, thus, ensured that the retail prices of e-books offered on its platform did not exceed the lowest retail prices of the same e-books sold via competing e-book retailers.

After preliminary assessment, the EU found Amazon to be on the wrong side of dominant position. The matter was settled through commitments offered by and accepted upon amendments by the EU. The final commitments ensured a ban on parity clauses capable of hindering (or likely to hinder) e-book suppliers and competing e-book retailers’ ability and incentives to work in differentiated business models. The commission noted that such ban would enable entry and expansion of the market by spurring competition.

Knocking at the CCI door

With numerous reports of the measures undertaken by Amazon to defy regulations in India, a learning as observed from the above precedents is that unlike in the US where publishers took too long to take any decisive steps to counter Amazon’s pricing strategies, and when they did Amazon drew them to the anti-trust court, in the EU, Amazon ended up offering level-playing commitments just after the preliminary assessment.

While Amazon may have learnt from its past experiences, and has multiplied its offerings to that of a conglomerate in one of the largest range of products available on a platform, it does identify India as a growing market.

In such circumstances, had Indian traders waited too long to knock at the doors of the CCI, the shift in the CCI’s approach towards e-commerce giants may have come too late.

The informant (the Delhi Vyapar Mahasangh) alleged that Amazon and Flipkart entered into several vertical agreements with preferred sellers, thereby causing appreciable adverse effect on competition; and investigation and consideration by the CCI was required on deep discounting, preferential listing, and, exclusive tie-ups. All these emanate from one or the other variant of Amazon’s earlier pricing strategies.

The CCI, while ordering its investigation, noted the allegations that the e-commerce entities were effectively employing exclusionary tactics to foreclose competition and, thereby, contravening the provisions of the Competition Act, 2002.

The CAIT submitted that Amazon Sellers Services Pvt Ltd and Amazon Retail India Pvt Ltd have a common email ID, and although the registered addresses of both entities are different (one in Bengaluru and other in Delhi), the place where books of accounts are maintained were shown as the registered office of Amazon Sellers Pvt Ltd in Bengaluru. Further, Amazon Retail and Frontizo Business Services Pvt Ltd have a common director and Appario Retail is a wholly-owned subsidiary of Frontizo. This points to common business interest. The same is fortified by both companies having a common director, thereby pointing to preferable treatment/collusion among Amazon and these sellers.

A June 14 scoop by The Guardian, read along with a Reuters report, identify Cloudtail as one of the largest sellers on Amazon, which is indirectly (76 percent) owned by Catamaran, a trustee of the Hober Mallow Trust, whose beneficiaries are the NR Narayan Murthy family. The balance 24 percent is indirectly owned by Amazon. Cloudtail reportedly faces a whopping demand from tax authorities in India. Moreover, The Guardian report mentioned earlier says that Cloudtail, which only sells via Amazon, has reportedly paid £95 million to Amazon.

While the Cloudtail board and senior management positions have been consistently filled with former board members/senior executives of Amazon, it is also alleged that Amazon, like in Future Retail, may also have scripted the shareholder agreements with Catamaran to give itself the option of buy Cloudtail in the future event of Indian FDI norms allowing this formally. As a result, Indian traders have suffered because of such opaque arrangements (as set out in their case before the CCI) bypassing FDI norms applicable to foreign e-commerce companies.

In regards to Flipkart, it was submitted that Omnitech Retail is the preferred seller as the trademark is registered in the name of Consulting Rooms Pvt Ltd. One of the directors of this company was earlier a director of WS Retail, which was previously owned by Sachin Bansal and Binny Bansal. Further, it was submitted that Flipkart indulges in selling below the cost price (predatory pricing) to capture the market and earn profits in the long run. This ‘loss funding’ in the case of preferred sellers is recorded in Flipkart India Pvt Ltd v Assistant Commissioner of Income Tax.

The Way Ahead

The high court order is not immune to being impugned in appellate rounds. Indeed, Reuters reported earlier today that Amazon and Flipkart have filed legal challenges against the Karnataka High Court's order of 11th June 2021 and the continuation of the CCI investigation. But other legal challenges persist for these e-commerce players. The Enforcement Directorate has initiated investigation against Amazon and Flipkart for violation of FDI norms pertaining to ‘platform neutrality’, which was introduced by the Government of India to effectively legislate against e-commerce entities that disguise their inventory-based business models as ‘marketplaces’.

Flipkart and Amazon India need to undergo complex structuring and restructuring to align themselves with any clarified policy. In this backdrop, the present CCI investigation shall have the occasion of screening even such restructuring measures.

Currently, there is no law catering to the intricacies of e-commerce business operations and regulating their affairs. Such a vacuum has led to the ongoing investigations. However, an understanding of the nuances and technical aspects of e-commerce is still at a very nascent stage in India and any slip along the way could significantly impact the ease of business initiative adversely.

As presented above, in several jurisdictions like the US and the EU, allegations of anti-trust activities against the e-commerce giants have been investigated by the regulators. The inquiry in these jurisdictions have prompted correctional amendments to clauses from their business contracts. Trader perception and allegation of the adverse economic impacts of the e-commerce entities through their market-capturing strategies are not premature. These stand not only confirmed by the CCI but also the high court, thereby justifying the SOS call.