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Explained: India's new draft e-commerce policy and how it will impact the e-tail space

Moneycontrol has reviewed the unofficial draft to bring an account of the key issues raised and how this will impact the booming online commerce space going forward.​

March 16, 2021 / 11:40 AM IST

A new draft of the proposed e-commerce policy was discussed in an inter-ministerial meeting on March 13, and the government will hold consultations with various stakeholders this week before unveiling the final policy.

Rapid internet penetration, low cost of data and smartphone access has led to an increased adoption of e-commerce in India, a trend that will continue as more Indians come online.

Moneycontrol reviewed the unofficial draft to bring an account of the key issues raised and how this will impact the booming online commerce space going forward.​

Curtail preferential treatment given by marketplaces to select vendors

In the draft, the government has said marketplaces cannot be "partial" to any of its sellers. This is not the first time the government is trying to address the issue. In 2018, it had come up with Press Note 2, revising the then-existing Press Note 3. It asked marketplaces to ensure that they don't sell products of their group companies on their platforms.

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Following the clarification, Amazon and Flipkart rejigged its ownership structure in some of their key sellers. In February 2019, Catamaran Ventures raised its stake in Cloudtail's parent company Prione Business Services. The move reduced Amazon Asia's stake in Cloudtail to 24 percent from the earlier 49 percent, with Catamaran Ventures’ stake rising to 76 percent from 51 percent earlier. Following this, Cloudtail ceased to be an Amazon group company, making it compliant with the rules.

Flipkart recently told its preferred sellers to procure the products directly from suppliers as against the existing model where the wholesale unit of Flipkart would sell the products to them.

Many traders have also alleged that marketplaces use the customer data they get by selling third-party products to their own advantage by launching private label products. Addressing this issue, the draft specifies that the marketplaces will ensure that the information collected by them is not used to obtain market advantage against the sellers on their own platform. There are no details, however, on how the government will ensure this is practiced.

Importantly, these restrictions that applied to Flipkart and Amazon might also now apply to their associates and related parties. It also says that they will update it from time to time to see if the companies are following the right structures.

Cracking down on algorithms 

For the first time, the government has stressed upon the fact that e-commerce companies should not use technology to the advantage of their preferred vendors.

"E-commerce operators shall ensure that algorithms used are not biased and that no discrimination due to digitally induced biases is prevalent," the draft said.

However, this is not going to go down well with the e-tailers. "Without a robust algorithm, a marketplace model cannot exist," said an executive of a leading e-commerce company.

Discounting likely to become a raw deal for e-tailers

Press Note 2 bars e-commerce companies from directly or indirectly influencing the price of goods sold on their platforms. However, the companies had a way out there as well. While some tied up with third-party agencies who would fund discounts to the sellers on behalf of the e-tailers, some would give their sellers benefits for funding the discounts through their own pockets.

The government has said now the companies will have to transparently declare the methodology used for discounts offered on their platforms. "E-commerce operators must ensure they bring out clear and transparent policies on discounts... the basis of discount rates funded by platforms for different  products/suppliers and implications of participation/non-participation in discount schemes, so as to ensure fair and equal treatment," the draft said.

While there is no mention of a regulator in the draft policy, it mentioned a Standing Group of Secretaries on e- commerce (SGoS) which will give recommendations to address policy challenges. "The SGoS is an important avenue of ensuring that the policy keeps pace with the digital environment. It will continue to be important in administering the e-commerce policy," it said.

Moneycontrol reported on March 15, 2021, that while the government is keen on a national e-commerce regulator, ministries differ on key details. The differences are over whether a new entity with sweeping powers is needed, or if existing agencies can do the job.

There is also no mention about the country of origin issue in the draft. The idea behind displaying the country of origin on the product is to ensure that consumers make an informed choice when they purchase a product, a move that was also expected to give the government's Make-In-India thrust a big boost.

Also read: E-tailers like Amazon, Flipkart need to treat all sellers equally, says draft e-commerce policy

Experts' view

According to experts, there would be some heartburn amongst the foreign investors if these rules take shape in the form of a policy in the coming months. However, not much can be done given that this is not a new set of rules. It broadly is just a set of strongly and aptly worded document which repeats the existing stance of the government.

On the other side, the Indian market is too huge to be ignored by the investors so it won't be possible for them to just pack their bags and go away. "The fact that this will happen was a writing on the wall. These issues were hammered in the heads of the companies all these years. They were very clear from the day one so there shouldn't be a negative impact from the investment point of view. It just brings the much needed clarity on the existing rules," said Atul Pandey, partner at law firm Khaitan & Co.

He also said the investor community had been seeking further clarity on the existing e-commerce regime particularly on the issue pertaining to control of inventory and treatment of sellers by the entity operating the e-commerce portal, as well as the exact roles and responsibilities of such entity.

"The draft e-commerce policy purports to provide further clarity on both these issues by clarifying further as to how sellers need to be treated equally and ensuring that all sellers have a level playing field, as well as providing clarity on the specific obligations of the e-commerce entity. This would provide further confidence to foreign investors to invest in the burgeoning e-commerce space in India," he said.

Lalit Kumar, partner at J Sagar, said the government believes that e-commerce entities tend to follow the rules in letter but not in spirit. "This is what the government hopes to plug. If the policy is made stringent, it could become difficult for e-commerce entities to conduct their business. Given the tremendous opportunities that e-commerce sector has in India, FDI may not really plummet, but surely doing business may become challenging," he said.

With more consultations slated for this week, it looks like an official draft of the much anticipated e-commerce policy will finally be published soon.

Also Read: Government keen on national e-commerce regulator but ministries differ on key details

At the end of it all, the policy draft also has the potential to nudge the customers a bit. The need for transparency on the discounting practices may push the marketplaces to stop benefitting sellers who in turn offer discounts on the marketplaces. This may, in turn, lead to steeper pricing on the e-commerce websites.

Interestingly, the discounts offered on e-commerce websites have anyway been tapering down in the last couple of years as compared to the 2014-15 period. This rule may be the final nail in the coffin.

The draft policy and the government's stance has also already drawn the ire of an association of online sellers who say they have always been left out of consultations.

"Our constituents are the largest stakeholders who will be affected by any policy changes or reforms in the ecommerce sector," said All India Online Vendors Association which houses 3,500 online sellers in a statement.

It has asked the government not to hold any discussion without its participation.
Priyanka Sahay
first published: Mar 15, 2021 04:30 pm
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