The New E-Commerce Rules and its Impact- Explained

On 23^rd July 2020, the Central Government had notified the Consumer Protection (E-Commerce) Rules, 2020 [‘Rules’] under the Consumer Protection Act, 2019. Last month, the Government proposed draft changes to these Rules and sought stakeholder comments for the same. Recently, various industry associations and e-commerce entities have submitted their recommendations to these amendments and called for substantial changes. In this article, I attempt to declutter the Rules and explain the major issues involved.

Models of E-Commerce

In India, e-commerce entities operate using either of the two models- inventory and marketplace. The Rules have defined these models. In the inventory model, goods and services are owned by the e-commerce entity and sold directly to the buyers. In other words, it maintains an ‘inventory’ of its own.

In the marketplace model, the e-commerce entity acts as a facilitator between buyers and sellers. For instance, when we buy a good from Flipkart, we are actually buying from a registered seller on the platform; Flipkart does not sell the good directly to us. The Rules apply to both models of e-commerce.

Definition of an E-Commerce Entity

The draft amendments have sought to widen the definition of an ‘e-commerce entity.’ An ‘e-commerce entity’ is any person who “owns, operates, or manages digital or electronic facility” for e-commerce and includes any entity engaged by such person for the fulfilment of orders placed on its platform and any related party of such person per the Companies Act, 2013.

As per many experts, the Rules provide no clarity on ‘fulfilment of orders,’ and a broad interpretation of the term would include even logistics service providers within the definition (as they technically help in fulfilling the orders). Similarly, one can argue that even local Kirana stores will fall within the definition even though they play a minor role in the supply chain of these entities. This will impose an onerous compliance burden on them under the Rules.

However, some of these inhibitions are unfounded, as the definition excludes sellers offering their goods and services in a marketplace e-commerce entity. Furthermore, logistics service providers have been mentioned separately in the Rules, indicating that they cannot fall under the definition.

The National Association of Software and Services Companies (Nasscom) has suggested that the word ‘owns’ must be removed from the definition of an e-commerce entity as most entities do not own, but rather license their online platforms and only operate/manage them. [For instance, if A owns an online platform that is licensed to an e-commerce entity B, A will also fall under the present definition of an e-commerce entity].

Registration of E-Commerce Entities

Every e-commerce entity must register itself with the Department for Promotion of Industry and Internal Trade (DPIIT) for the allotment of a registration number. The registration number should be displayed on the website ‘in a clear and accessible manner.’

Appointment of Officers

In line with the IT Rules, every e-commerce entity must appoint a Chief Compliance Officer (for ensuring compliance with the Rules), a nodal contact person (for coordination with law enforcement agencies), and a Resident Grievance Officer. The name and contact details of the Grievance Officer must be displayed prominently on the website and mobile application of the e-commerce entity. A Grievance Redressal Mechanism has to be put in place.

The Rules do not differentiate between different e-commerce entities based on their size, which can force small sellers and e-commerce entities to comply with these requirements and increase their costs significantly. Many might pass these costs to their sellers, who will increase the price of their goods and services, ultimately hurting the consumer.

Cross-Selling, Mis-Selling and Flash Sales

Cross-selling refers to the sale of goods and services which are related/complementary to the purchase made by the consumer so that the e-commerce entity can maximise its revenue. (For instance, when you buy a smartphone, the website prompts you to buy a headphone along with it). The e-commerce entity shall provide the name and data of the entity used for such cross-selling in a clear and accessible manner to the users.

Mis-selling refers to the sale of goods and services by an e-commerce entity by deliberate misrepresentation of information by such entity about the goods and services. An e-commerce entity cannot indulge in mis-selling of goods and services

Flash Sales have been defined as sales organised by an e-commerce entity by providing heavy discounts for a pre-determined amount of time on selective goods and services (Example- Flipkart Big Billion Days Sale). The definition, however, has included only those sales which are fraudulently organised, and technological means are used to enable only a particular group of sellers managed by the entity to sell their goods and services on the platform. Such flash sales have been banned. Most industry associations and e-commerce players have sought the deletion of this provision as they argue that it is vague and will be implemented arbitrarily.

Fall-Back Liability- The Most Contentious Clause

The concept of fall-back liability for a marketplace e-commerce entity has been introduced in the Draft Rules. It means that the e-commerce entity will be liable (responsible) if any seller registered on its platform fails to deliver the goods and services ordered by a customer or causes loss to the customer through any other act. Thus, the consumers will be able to register any grievance directly with the e-commerce entity.

The provision has been criticised by the stakeholders as e-commerce entities maintain little control over the sellers registered on their platform in a marketplace model. They have also argued that the provision goes against the principles of FDI policy under Press Note 2, 2018, which had banned e-commerce entities from exercising any control over the sellers. [It provided that marketplace e-commerce entities shall not exercise any control over the inventory, i.e., goods sought to be sold].

Compliances for Imported Goods

The e-commerce entity must mention the name and details of the importer from whom the goods and services have been purchased. It must also identify goods based on the country of origin, and at the pre-purchase stage, display domestic alternatives of the good sought to be purchased. Finally, it must also provide rankings for goods and services without discriminating against domestic sellers.

The DPIIT has clarified that the sellers have to display the country of manufacture of the final product as the country of origin, considering that the production process may occur in more than one country. However, the same has not been clarified in the Rules, which may lead to unwarranted confusion.

The e-commerce entities are worried about identifying the country of origin timely and accurately as many sellers were not able to comply with previous attempts to mandate the display of MRP (for packaged items) and ‘Best Before’ for human consumption items. Further, they argue that the sellers must be made liable for failing to display such information on the products instead of the e-commerce entity in a marketplace model.

Other Important Compliances

An e-commerce entity cannot use the information collected through its platform for the unfair advantage of its related and associated parties. It also needs to ensure that its related/associated party is not listed as a seller for sale to the consumers directly. This, coupled with the ban on flash sales, may limit consumer choice and increase prices. For instance, Tata has claimed, “that the proposed condition was problematic, citing an example in which it would prevent Starbucks, which has a joint venture with Tata in India, from offering its items on Tata’s marketplace website.”

[Examples of related parties- the director of the e-commerce entity and his relatives, a firm in which the director of the e-commerce entity is a partner, subsidiary of such entity, etc.]

[Examples of associated parties- two enterprises are connected through a common chain of directors/shareholders, one enterprise holds voting power in the other enterprise, etc.]

Conclusion

Several industry bodies and other stakeholders have voiced their concerns over the amendments. The National Association of Software and Services Companies (Nasscom) has said that some of the proposed amendments “like provision of accurate information to consumers, the appointment of additional officials for grievance redressal and compliance with the e-Commerce Rules” are beyond the scope of the Consumer Protection Act and are the subject-matter of the Competition Act, 2002 or the Information Technology Act, 2000.

In fact, the Competition Commission of India (CCI) had launched a probe against Amazon and Flipkart in January under the Competition Act as it had received complaints against the e-commerce giants for providing deep discounts and preferential treatment to sellers in which they own a stake. The present Rules aim at addressing this among a host of other issues. In some way, they are encroaching upon the CCI’s domain which might give rise to a separate set of problems.

That there will be a pushback from the industry is a given. As we have seen, while some of the concerns are unfounded, others are extremely genuine. It remains to be seen how the Indian Government responds to the suggestions and recommendations and releases the final draft of the Rules thereafter.

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