The Curious Case of E-Commerce Models in India

Prefatory

The year 1991 has been a game-changer for India; however, nothing has remained the same ever since. The introduction of ‘E-commerce’ in India not only changed the way how people buy products but also contrived a critical situation for brick and mortar stores that follow the traditional routine of buying and selling. According to the projections of IBEF (India Brand Equity Foundation), the Indian E-commerce industry is set to reach the US $99 billion by 2024 but at the same time, the survival strategy of any small retailer/Kirana store is to shake hands with the big players of the E-commerce market. Moreover, it is not uncommon how e-retail giants like Amazon have been flouting rules and twisting their practices in order to make maximum profits. The retail sector in India is unorganized which makes it important for the Government to prioritize them while framing a feasible E-commerce policy.

Inventory Based or Market Based?

A Marketplace model of E-commerce is where an IT platform is provided in the form of a market that facilitates various buyers and sellers to connect and conduct trade.
e-commerceIt is a network where buyers can discover sellers based upon their preference of price, quality, quantity, etc. For instance, if an individual purchase a product from Flipkart, he is actually buying from a registered seller on Flipkart. Flipkart here is an electronic network that provides a ‘Marketplace’ in order to facilitate the trade. On the other hand, an Inventory based model is the one where the inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly. The marketplace owners own the products and also manage the complete end-to-end sales process. The whole controversy prevailing between the Government Regulatory Authorities and the E-commerce giants conducting business in India is regarding the limitation in having a choice of Inventory based model of E-commerce.

[Image Source: gettyimages]

The revised FDI guidelines (2020) on multi-brand retailing have placed a clear distinction that any entity that provides a marketplace shall not have control and ownership in the inventory, which is the goods stock to be sold. The embargo has been placed over the marketplace entities that if any of their group companies are selling more than 25% of what the vendor is selling on the marketplace, it will fail to qualify as a marketplace and will be seen as an inventory-driven FDI marketplace where FDI is prohibited. According to these regulations, an entity can take up only 25% of the total purchases from its subsidiaries, if they wish to continue their business through the marketplace-based model of e-commerce. Marketplace-based model of e-commerce has the liberty of 100% FDI through automatic route whereas inventory-based model has none, the basic idea of the said regulation is to keep marketplace a sales-driven platform where there is an opportunity for different players to carry out business. The said rule is furthered by a restriction brought about by the new regulations that the marketplace entity or any of the group companies of the marketplace entity cannot own a single percentage of equity in any company which is a vendor on the marketplace. This means that an entity providing marketplace shall not have a stake in the vendor company as well, which extinguishes indirect ownership in the transactions on the marketplace. If the marketplace entity does not take up more than 25% of business on the marketplace but has equity in the vendor companies then it defeats the purpose and hence such exercise is not allowed.

It can be easily construed from the above guidelines that the same have been introduced to keep the small players in the game and to safeguard them from the exploiting tactics of giants like Amazon. Amazon is undoubtedly the largest online trading company in the world. It highlights 400,000 plus Indian sellers on its online platform but the fact is that only 33 Amazon sellers account for about a third of the overall sales conducted on the company’s online platform. Amazon owns a minority stake in the parent companies of ‘Cloudtail’ and ‘Appario’ where it does not have a direct stake in either of the two sellers which account for the majority of the sales carried on its platform. According to the Forrester research, in 2019, Cloudtail accounted for 40% of the overall $10 billion sales clocked by Amazon in India. ‘Cloudtail India’ is essentially owned by Prione Business Services, which is a joint venture between Amazon India and NR Narayana Murthy’s Catamaran Ventures. On the other hand, Appario Retail is a company owned by Frontizo, which is a joint venture between Amazon India and Patni Group. Amazon time and again has been adjusting its ownership and holdings in the said ventures in order to conduct E-retailing in India under the Marketplace model.

CCI’s Step in

The Competition Commission of India (CCI) is a statutory body established to promote fair competition in the market and prevent anti-competitive practices and such activities that have an appreciable adverse effect on the competition in the market. The CCI has, time and again, received complaints of Amazon and Flipkart for anti-competitive practices from various stakeholders in the Indian market. These e-retail giants arguably have a dominant position in their respective markets. This enables them to enter into agreements with specific sellers that can oust various other sellers from the market, provide deep discounts to selected sellers, give preferential listings on the website, and create barriers for new entrants in the market.

Recently, the Competition Commission of India has received a complaint against Amazon India, filed by the representative of a group of small online sellers called ‘Aiova’. It has been alleged that Amazon has been giving preferential treatment to selected sellers like Cloudtail where it holds equity. This comes at the time when Amazon is already facing a suit of similar nature before the Karnataka High Court. Not only this, but regulators like the Reserve Bank of India and Enforcement Directorate are also investigating allegations of FDI violations by Amazon and Flipkart.

Way Forward

Even though the magical numbers of the E-commerce industry in India are skyrocketing, the fact remains that the online retail market constitutes only 3% of the total retail market. The kind of model that Amazon adapts to run its business is suitable for an economy with an organized retail sector and not a country like India where the maximum retailing is done through small or Kirana Shops. In 2020, Amazon announced a pilot project named ‘Kirana Now’ which is an express delivery platform with its tie-up with the traditional brick and mortar shops in India. The said project is launched to cater to the need of the local market and also digitalize the business of such small shops. But the concern that arises here finds its genesis in Amazon’s behavior in the past recent years. The initiation of relationship building with the Kirana stores may or may not be pure business but one cannot be relieved that Amazon will not repeat its foul strategies to control the market again.

The Government, on the other hand, has been constantly reviewing and changing its policies in an attempt to build a strong and stringent E-commerce Policy that provides a fair market to the e-retailing giants and helps strengthen the traditional retail sector as well. The question, “How will the small players survive in competition with the E-commerce giants in the retail sector?”  has constantly pushed the government to amend policies. Even after constantly changing rules, there has been non-compliance with respect to the same and the Confederation of All India Traders (CAIT) has repeatedly shown its concern over e-retailers violating FDI rules. The concern is over entities providing E-commerce platforms still holding a stake in the seller indirectly. In wake of this, the Department of Promotion of Industry and Internal Trade (DPIIT) may release even stringent guidelines in order to curb such practices. The government is also considering prohibiting online sales by a seller who, for example, purchases goods from an e-commerce entity’s wholesale unit, or any of its group firms, and then sell them on the entity’s websites. This move may limit the E-commerce giants to leverage their scale in India, but what can one do when the question is of fair competition and equal treatment.

Author: Gaurav Sharma, a Final Year student of Symbiosis Law School (Pune), an intern at Khurana & Khurana, Advocates and IP Attorneys.  In case of any queries please contact/write back to us at aishani@khuranaandkhurana.com.

Leave a Reply

Categories

Archives

  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • September 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010