New e-commerce rules may hinder business growth of companies, say experts

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Updated: June 24, 2021 8:10 AM

Industry observers said the reading of the norms suggest that growth of certain private label brands like Amazon Basics may take a hit.

ecommerceThe Karnataka High Court on Friday had dismissed petition by Amazon and Flipkart that challenged a probe by the Competition Commission of India against alleged anti-competitive practices.

The new draft e-commerce rules issued by the consumer affairs ministry earlier this week is likely to increase the compliance requirements of e-commerce companies and have the potential to stunt the business growth of the firms as the proposed amendments attempt to curb broad discounts, restrict the expansion of private labels, strategies companies often bank on to get more users, experts said.

Nikhil Narendran, partner at Trilegal, said that the term flash sale has been very loosely worded in the draft regulations and it appears that the definition implies a check on events that typically run for a certain duration like grand Diwali sales or something akin to heavy discount events like a Black Friday or Cyber Monday sale that is prevalent in the West. “This to my mind is anti-consumer in nature. It is not something a consumer protection law should say. Malls run grand shopping festivals but barring e-commerce entities from doing the same does not make sense,” Narendran told FE. Flash sales happen when a company offers immediate discounts to buyers to dispose of a large stock of products; that is the general understanding, Narendran explained.

Although the government issued a clarification stating that conventional flash sales are not banned but only certain flash sales or back-to-back sales that limit consumer choice and increase prices will not be allowed, uncertainty remains. “What do you mean by large number of consumers, predetermined period of time? (as per the definition of flash sale in the rules) I could have a sale running throughout the year. There is no guidance provided in this to interpret. That is where I feel that businesses do not know how to create (discount) strategies while it gives unreasonable discretion to regulators,” said Gowree Gokhale, partner at Nishth Desai Associates.

Industry observers said the reading of the norms suggest that growth of certain private label brands like Amazon Basics may take a hit. As per the draft rules, “no e-commerce entity shall permit usage of the name or brand associated with that of the marketplace entity for promotion or offer for sale of goods and services on its platform in a manner so as to suggest that such goods or services are associated with the marketplace e-commerce entity”. (In the case of Amazon Basics, the word Amazon is there).

Atul Pandey, partner at Khaitan & Co., said the proposed amendments require all e-commerce entities to register with DPIIT which was not the case earlier, thereby increasing the compliance burden. Also, it appears that the scope of e-commerce has been broadened to include third-party entities engaged in providing operational support to platforms in fulfilling the orders (like logistics service providers). If the rules take shape, marketplace platforms will have to take responsibility if a customer incurs losses due to the actions of a seller. “So far, companies used to take the benefit of being an intermediary,” said Khaitan.

Legal analysts said the move to include the appointment of chief compliance officer, nodal contact person and resident grievance officer is a blatant replication of the recently introduced new IT rules and completely unwarranted. “Most of the e-commerce platforms will be intermediaries to a larger sense and they will be compliant with due diligence under the intermediary liability rules. So, there is no need for such clauses in e-commerce rules,” said Trilegal’s Narendran.

Pandey said most of the proposed regulations are already in place in one form or the other. “The amendments appear to be in the nature of regulating trade and commerce and not just protecting the interests of the consumers. It looks like there is an overreach and the government should draw a fine balance,” said Khaitan. For instance, the rules state that none of the related parties of e-commerce entities should be enlisted as sellers. The DPIIT has already mandated e-commerce firms having foreign direct investment (FDI) to reduce their shareholding in preferred sellers to not more than 25%. “It seems that the government wants to do away with this completely. However, this time around, it will apply to all companies,” said an analyst.

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