E-commerce litigations set to rise, feel observers

Everyone in the space consulting their set of lawyers on how to prepare for the next set of events

It could be a bumpy ride ahead for online e-commerce companies in India, as litigation in this space could go up.

Legal experts and analysts say the latest Press Note 3 on foreign direct investment (FDI) guidelines issued by the department of industrial policy and promotion (DIPP) has left a lot for interpretation.

Experts are seeing a rise in the number of cases where offline retailers, trade associations and even merchants of online marketplaces are going to the courts, asking for intervention of agencies such as Competition Commission of India (CCI) and the Enforcement Directorate (ED). In fact, companies are strengthening their legal departments in the backdrop of the current business environment, a sector representative said.

LEGAL TANGLE

• Offline retailers, trade associations and even merchants of online marketplaces are going to the courts
   
• They are asking for intervention of agencies such as CCI and ED
   
• Legal experts say the guideline confusion is mainly due to interpretational gaps
   
• These interpretational gaps include clauses around the 'direct or indirect' influence of price
   
• Provisions give more ammunition to traditional retailers in legal battle against these firms

“For instance, we are unclear about what the guidelines mean on indirectly influencing the price,” said a senior executive of an e-commerce company. One of the guidelines in Press Note 3 is that no e-commerce marketplace platform must directly or indirectly influence the price of products sold on the platform. This is turning out to be among the trickiest.

Legal experts say this confusion is mainly due to interpretational gaps. “The intent is to distinguish between the permitted activity within e-commerce, that is the marketplace model, and what in e-commerce would amount to retail trade, which is the inventory model. In line with the regulatory thinking on FDI, PN3 permits FDI in entities engaged in the marketplace model, and prohibits it in the inventory model. Yardsticks have been set out to determine what would constitute a marketplace. The confusion is in relation to some of these yardsticks,” said Abhilekh Verma, partner, Khaitan & Co.

He adds some of the crucial interpretational gaps include clauses around the 'direct or indirect' influence of price. “There is no clarity on what would constitute 'influencing' the price of goods sold on the platform. Given the broad interpretation that can be attributed to this term, even genuine business transactions can fall within its ambit and, consequently, be challenged by the authorities,” he added.

A few weeks earlier, traders’ body CAIT filed a complaint with DIPP, alleging violation of FDI norms for e-commerce by online retail major Flipkart. The complaint was in reference to an advertisement in newspapers announcing the sale of an item, together with its discounted price, to be available on the e-commerce platform of Flipkart, a marketplace. CAIT says the advertisement violates the guidelines for FDI in e-commerce. Organisations such as the All India Vendors Association (AIOVA) has also taken on companies such as Paytm using micro blogging social media network Twitter.

It asked DIPP to clarify if the practice of giving cash-backs by Paytm above the seller-funded discount was within the purview of the FDI guidelines on the segment. DIPP replied, through a tweet, that the choice was with the seller. “Giving a discount or not is a prerogative of the seller owning inventory. FDI permitted in marketplace, not in inventory-based model,” it said.

Online marketplace players claim they are well within their limits to work in the way they are, and are doing things according to their ‘interpretation’. And, the action taken by the companies is their interpretation of the guideline. “There are certain things that you do to promote the platform and what we find confusing in the new guideline is that even if you have to promote the platform indirectly and if that has an influence on price, you are somewhere violating the regulations. There is a spectrum of options online marketplaces are coming out with, such as incentivising sellers in other ways, to coax them to give better discounts. We are going to 100 per cent comply with government guidelines but according to the way we interpret them,” added the executive.  

Experts say offline retailers are trying to give a very strict interpretation to PN3.  

Legal experts agree the provisions give more ammunition to traditional retailers in their legal battle against online marketplaces.

“The 'influencing of price' by a marketplace has to be understood only to the extent that a marketplace is offering a price point to a buyer, which is lower than the price at which seller is agreeable to receive net of commissions/ fulfilment charges.  In other words, the marketplace cannot give deep discounts which go beyond the commissions it makes from the seller.  The PN3 guidelines are governed by the Foreign Exchange Management Act and are meant to avoid use of FDI to subsidise prices of the seller,” said Amarjeet Singh, partner at KPMG in India.

“We can also expect a fresh round of litigation based on the conditions (such as no pricing influence and not beyond 25 per cent sale by a single vendor) set out in PN3. In addition to the opposition by traditional retailers, unrest among vendors listed with online marketplaces is also growing. Some of the broad allegations of such vendors pertain to compulsory use of logistic services of marketplaces, skewed refund policies, retention amounts and disclosure of strategic discount pricing to other vendors. Regulatory intervention in this regard has been sought by one of the associations of such vendors,” said Sanjay Khan Nagra, senior associate at Khaitan & Co.

There is also fear of increased scrutiny from agencies such as CCI and ED, given the increased regulatory push on the e-commerce sector. Chances are that these agencies would work closely with their counterparts monitoring tax and exchange control aspects to check companies flouting the norms while conducting e-commerce business.