It looks like the problems of e-commerce entities in India are not going to subside any time soon. India’s two major foreign-owned e-commerce entities suffered a major blow when the Karnataka High Court last week rejected their request to halt the investigation by the Competition Commission of India (CCI). The ICC wants to investigate these entities for their alleged violation of India’s competition law. The allegations are that these entities favor few selected and preferred sellers on their e-commerce platform, which benefits them immensely but to the detriment of convenience stores and small retailers. CCI believes this is unfair and anti-competitive and needs further investigation.
The court’s verdict clears the way for CCI to continue the investigation. It seems that the giant e-commerce entities haven’t hung up their boots yet. They both challenged this court order to the court’s division bench. The ball was put back in the court.
This court verdict, if not overturned by the divisional bench, could have far-reaching consequences, not only for these large e-commerce entities, but for the entire Indian industry and operations of the e-commerce. Moreover, believing that e-commerce entities flout foreign direct investment (FDI) rules by following them only in the letter of the law and not in their spirit, the government has already planned to further tweak the rules of FDI for this sector. Thus, there might be more problems ahead for this sector soon.
FDI rules for trade are not new to controversy. This sector has been the subject of much legal and political debate. It is said that IDEs are open for this sector, yet they are not open!
To give some perspective, let’s go back a bit. Major FDI reforms were announced in 2016. At that time, 100% FDI without any nod from the government was allowed for e-commerce, but only for the marketplace. This meant that e-commerce entities could only act as facilitators between buyers and sellers. The most profitable and tempting activity in the inventory-based model has not been opened up to FDI. This model was one where an e-commerce entity could own and sell its own products online on its electronic platforms. The ban on FDI in the inventory-based model was meant to protect small and medium-sized retail stores. This has always been the bone of contention.
While e-commerce companies want to exploit this activity, FDI rules do not allow it. The FDI policy and various government press releases and circulars contain restrictions ensuring that no foreign-owned e-commerce entity should own and sell its own products. Thus, they should function only as market entities. This makes business difficult for these entities. India’s call for FDI for this sector could certainly be seen as holding a sign that says – You are welcome, but we are a tough place to do business! Make your own decision!
Beyond the legal provisions, it will be useful to put into perspective some perspectives that show the contribution of e-commerce and retail to India’s growth. Without a doubt, India is a retail market and has a huge appetite for growth. You could say that e-commerce accounts for around 3-4% of the retail market share, but even then, it has added tremendous value to communities and the economic growth of the country. Statistically, the retail market in India could be estimated at around $700 billion (around Rs. 51,95,319 crore). So there is huge potential for growth and development of global technologies that can integrate mom and pop stores. Everything can coexist. In terms of technology, the real advantage will only be achieved when cutting-edge local innovation opens market access to small and medium-sized industries.
It has already started. Dispersed small businesses could take advantage of this efficient and cost-effective channel to gain market access beyond their local areas of operations. Overall, the market and supply chain can be integrated nationally and then globally. Thus, e-commerce is truly a catalyst for growth and not a destroyer, as one might perceive. In return, he expects a favorable and conducive business environment to ensure India’s economic growth and create abundant jobs.
The rule of law must be respected and upheld in all circumstances. But it is equally important that companies with enormous potential are encouraged. The legal framework and its implementation should aim to encourage businesses, including this important e-commerce sector, to foster competition in many meaningful ways.
While all entities that flout the rules need to be held accountable, but at the same time business and industry need a conducive business environment with clear and consistent legal policies. Taking a narrow, conservative view of situations and making frequent changes to policies and laws could hurt investments. There is a need to strike the right balance if India really wants to be an investor-friendly nation globally.
(The author is a partner of J. Sagar Associates. Opinions are personal).