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Consumer Protection (E-commerce) Rules, 2020 - Two steps forward and one step back?

Contributed by: Samvad Partners

India’s start-up environment is propelled by e-commerce businesses, the fore-runners ranging from Flipkart, Snapdeal to Bigbasket. Given the ever-growing demand and thriving internet usage in the country, India has emerged as one of the biggest markets for e-commerce, across the globe. E-commerce entities have proven a relatively safe investment bet for investors, both foreign and domestic.

Consequently, legislators are keen on regulating the e-commerce business in India, and a step towards this began in 2018, when the Department of Industrial Promotion and Policy, vide a press note, notified the policy on foreign direct investment in e-commerce (“Press Note”). The Press Note came in the wake of multiple foreign investments that were received by Indian e-commerce companies, therefore, creating a substantial agitation and stir in the traditional brick and motor model of businesses in India. Close on the heels of the Press Note, the government attempted to create a national e-commerce policy, which has now partly culminated in the Consumer Protection (E-Commerce) Rules, 2020 (“E-commerce Rules”).

While the Press Note was notified pursuant to review of ‘foreign direct investment’ in these entities, much of the regulations contained in the Press Note, primarily were an attempt to combat unfair trade practices, fueled by the control exercised by e-commerce entities on the supply and distribution channel (the Press Note primarily restricted the control of e-commerce entities over the products sold on its website). However, the Press Note was applicable only to companies having foreign direct investment and the intent behind the same was largely to ensure level playing field for brick and mortar business, especially mom and pop shops, who may not have the muscle that foreign investments could provide. The E-commerce Rules on the other hand cast a wider net and regulates trade practices by both companies with and without foreign direct investment, and is intended to ensure that ultimate consumer who avails goods / services from an e-commerce entity is protected.

Applicability: The E-commerce Rules governs both (i) inventory and market-place model of e-commerce; (ii) e-commerce platforms and sellers on these platforms. However, it restricts its scope, basis the juristic personality/constitution of the e-commerce entity. To elaborate, only companies incorporated under the Companies Act, 2013, foreign companies and office, branches of entities incorporated outside India, have been included in the scope of ‘e-commerce entities’. This restrictive definition of ‘e-commerce entities’, will therefore exclude any limited liability partnership (which are permitted to receive foreign direct investments), partnerships, sole proprietorships from the ambit of the E-commerce Rules. This definition is similar to the definition set forth in the Press Note and therefore indicates repeated legislative intention to exclude un-incorporated entities and limited liability partnerships. While it maybe, argued that the exclusion is deliberate to ensure these entities are not saddled by the extensive compliance requirements under the E-commerce Rules (captured below), it may have been worthwhile to extend atleast limited applicability of E-commerce Rules to these entities, especially since the purpose of this regulation is consumer protection. Given the increase in small scale entrepreneurships, propelled by social media networks, even a limited application of the E-commerce Rules, atleast to the extent of combating unfair trade practices, would have increased accountability of these small and medium sized vendors, who do not house their businesses in companies, and ultimately protected consumers.

Mandates: The E-commerce Rules prescribe: (i) disclosure of certain mandatory details with respect to the e-commerce entity, sellers on the platform and the products; (ii) disclosure of any differential treatment offered by a platform to particular sellers and the parameters deployed in the determination of ranking of sellers and products; (iii) disclosure of payment mechanisms and terms of usage of such payment gateways/mechanism; (iv) establishment of adequate consumer grievance mechanism along with appointment of a grievance officer; (v) that consent be explicitly sought with respect to each purchase and each terms of the purchase, without enabling automatic recording of the same; and (vi) appointment of a nodal officer to ensure compliance with the E-commerce Rules. Market-place entities have been additionally tasked with maintaining records of sellers violating intellectual property laws, i.e. selling counterfeit goods on the platform.

Apart from the specific obligations imposed, as stated above, the E-Commerce Rules has also restricted e-commerce entities from (i) adopting unfair trade practices, (ii) manipulating price, and (iii) discriminating between consumers of same class. Given (i) and (ii) are more in the nature of standard anti-competitive directions, question does arise as to why the same is being regulated under consumer protection laws when the antitrust laws legislates on these issues fairly extensively, with the anti-competition watchdog, Competition Commission of India, keeping a close eye on anti-competitive agreements as well as behaviour. Furthermore, the mandate to discriminate between consumers of the same class raises further questions, namely: (i) how to determine whether different consumers fall within the ‘same class’? (ii) does this impact loyalty programs that maybe launched by the e-commerce entities? It is to be noted that loyalty programs are offered both by e-commerce entities and brick and motor shops, regularly and have historically have not been deemed anti-competitive as such programs aims to retain repeat consumers. This further leads to the question of whether e-commerce entities should be subject to rigorous compliance structure and standards, as compared to offline shops which are unregulated and unrestricted in terms of the offers/consumer incentives granted.

The E-commerce Rules, apart from regulating the e-commerce entities, also seeks to regulate the sellers on the e-commerce platform. Apart from mandating that the sellers do not adopt unfair trade practices, the E-commerce Rules specifically mandates that sellers (i) not refuse to withdraw, take back or refund products; (ii) have prior written contract with e-commerce platforms; (iii) appoint grievance officers; (iv) disclose contractual and pricing (along with the break-up on taxation) related information; (v) advertisements are not misleading, and most importantly, (vi) not falsely represent themselves as consumers and post reviews about the products. The posting of fake reviews has been a critical pain point in e-commerce businesses with reviews of products greatly oscillating between control between fake/paid reviews favouring the products and internet trolls depreciating the value of the products being sold. The E-commerce Rules, attempts to address atleast one of the limbs of the problem of fake reviews, and seems to be a welcome move.

While the E-commerce Rules, is a step in the right direction towards protecting consumer rights in a very dynamic market, the current regulatory framework, appears to be selectively applicable, imposes extensive compliance requirements and additional business/operational restrictions on e-commerce entities than the regulatory framework governing their offline counterparts. Since e-commerce and technology driven models of business are the way ahead to the future, it maybe advisable to level the playing field between the brick and motor business and e-commerce entities. While it is granted that, e-commerce entities currently have the economic advantage and brick and motor business may need additional support from the government, it is to be noted that several e-commerce entities have taken up efforts to enlist and encourage small traders. In fact, there has been marked increase in the number of mom and pop shops as well as brick and motor businesses who have benefited from listing on online platforms as well. Therefore, it maybe critical for the government to ensure that a fine balance is drawn between varied interests, support brick and motor businesses in adapting to a dynamic environment rather than hampering the ease of doing business for an e-commerce entity.

Contributed by Samvad Partners

The above article has been authored by Ms. Ashwini Vittalachar(Partner) and Ms. M.V. Abhinaya(Associate)

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