A ban, a Chinese e-comm firm and case of distraught Indian sellers

Indian sellers say hundreds of them have been denied legitimate payments, cite a host of other malpractices by China's Club Factory

In July 2020, middle-class Indians smashed ‘Made-in-China’ television sets, burnt effigies of Chinese President Xi Jinping, and rallied behind their leaders to support the call for forging an ‘Atmanirbhar Bharat’. Around the same time, a Chinese company was allegedly plotting an escape plan without fulfilling its contractual obligations to business partners in India.

The company was Club Factory, once the third-largest shopping app in India, after Amazon and Flipkart, in terms of monthly active users (MAU). On June 29, 2020, the Centre banned Club Factory and 58 other Chinese apps, citing concerns about the data privacy of Indian users. The government never elaborated on the ‘data privacy’ concerns that ostensibly prompted the ban. One can’t miss the fact that the ban came days after the Indian and Chinese armies had clashed in Ladakh’s Galwan Valley.

Data privacy threat or not, nearly a year after the ban, more allegations about Club Factory’s misdeeds are spilling into the open, as former employees open up about all that was happening behind closed doors.

One such source, a former employee at Club Factory, told Business Standard that even after the ban, the company was accepting orders through a new domain. Media reports in July 2020 had suggested the same.

“The Chinese directors were constantly telling us to take orders. Account managers based in China assured the sellers that their dues would be cleared,” the source said.

On July 15, 2020, in an email to sellers, Club Factory called the government’s ban on its app a ‘Force Majeure’* event and suspended their payments. It assured the sellers that their dues were secure and would be cleared once the company resumed operations in India. That never happened. Almost a year later, sellers cry foul over what they allege to be a ‘scam’.

Legal experts feel Club Factory cannot invoke ‘Force Majeure’ when the National Disaster Management Act is in place in the country. The Indian government invoked NDMA in March 2020, when it announced a countrywide lockdown to curb the spread of Covid-19. The Act is still in force. The All India Online Vendors Association (AIOVA), in its legal notice to Club Factory last year, said the Reserve Bank of India (RBI) directives require marketplaces to keep sellers’ dues in an escrow account. An escrow account is one where funds are kept in trust while two or more parties complete a transaction. AIOVA claimed ‘Force Majeure’ doesn’t apply to an escrow account.

The employee source cited above said that Club Factory’s alleged wrongdoings preceded the app ban, an example being how the company would manipulate shipping and RTO fees to charge excess money from sellers.

A long list of alleged malpractices

While most e-commerce portals charge sellers a commission of 5-15 per cent on each sale, depending on the product category, Club Factory advertised zero commission from sellers. “However, Club Factory would fleece sellers using inflated shipping fees and purported order cancellations,” the source said.

“For cancellations, e-tailers charge sellers the RTO (return to origin) fees, for returning the item to the vendor. Club Factory started a mass exercise of fake cancellations to inflate the RTO charges,” the source alleged.

Another source, also a former Club Factory employee who looked after a product category, said some sellers would have a negative balance of payment with the company because of fake cancellations and inflated shipping and RTO charges.

Both sources, though former employees, spoke on the condition of anonymity as they were wary of damage to their reputations in the industry by revealing they had worked at Club Factory.

Shailendra Mehta, owner of India Ecom, who had been selling electronics and mobile accessories through Club Factory for a year before the ban, backed these employee sources’ allegations about inflated shipping and RTO charges.

According to Mehta, most ecommerce platforms offer sellers a return rate of around 30% — out of every 100 orders delivered to the customer, 30 will be returned for various reasons. However, for Club Factory, the return rate for Mehta was around 70%. Besides fake cancellations contributing to the high return rate, as suggested by both sources, the lower-grade quality of the products that were traded through Club Factory could be another reason. More on that later. 

Once the company invoked the force majeure clause, sellers like Mehta saw their pending dues for products delivered stuck with the company. For Mehta, the pending amount is Rs 32 lakh.

Sellers’ dues were held back in various ways

Most e-commerce portals hold back a certain percentage of their weekly payouts to sellers, which they release with the next instalment. The portal holds this amount as a buffer, if several customers return a vendor’s items and the portal has to refund their money. Club Factory would withhold 20 per cent of the weekly payout to sellers but rarely settle within the stipulated time, said one source.

Pankaj Gaba, who mainly sold Kurtis and bedsheets on the platform, told Business Standard that in March 2020, days after the lockdown was enforced, Club Factory informed him that his 20 per cent weekly deposit amount would be cleared once the company’s entire staff returned to the office. The deposit amount kept accruing for months but was never cleared once the company invoked the ‘Force Majeure’ clause. Gaba is waiting for a payment of Rs 3.3 lakh from the company.

Violation of India’s e-commerce rules?

Sellers like Mehta were also privy to how Club Factory allegedly bypassed India’s regulations for e-commerce companies operating with a marketplace model. According to these rules, an e-commerce marketplace can only act as a link between buyer and seller, but cannot own any inventory that it sells through its platform. Mehta and one source cited above claimed that the company was violating this clause by importing goods from China, using Indian sellers as proxies.

“The company used to take bulk orders for goods in China. They would then contact the Indian seller whom they intended to use as a proxy. They would inform him about the orders, ask him to import the consignment and then deliver the goods to Club Factory’s customers,” the source explained.

To the casual observer, an Indian seller was importing a consignment for his homegrown e-commerce business. In reality, however, the seller was just a proxy, an ‘import facilitation partner’ as Club Factory called him, and would get a commission from the company.

Mehta said since he was among the top seven sellers on Club Factory, the firm had asked him to import a consignment for a commission, an offer he declined.  

Sellers' associations such as AIOVA and the Confederation of All India Traders (CAIT) have often made similar allegations of ‘anti-competitive practices’ against Amazon and Flipkart.

Another seller, Pradeep Chandwani, who sold electronics products through Club Factory, is waiting for a payment of Rs 2.58 crore from the company. In August 2020, Chandwani sent a legal notice to the company over non-payment of dues. Replying to the notice, Club Factory said it could only settle the dues if India lifted the ban on its app. The company said it was in talks with the Indian government and was confident that the ban would be lifted soon. Months later, the Centre has made no indications that it would ever reverse its ban on Chinese apps. As for Chandwani, he has filed a case against Club Factory in the Jabalpur High Court.

From July-September 2020, legal notices sent to Club Factory’s registered address in Delhi were met with responses stating that the company had “left” India. The same happened with Chandwani’s notice, at which point, it was sent over email to the directors. By August-end, the company’s office was shut as most employees had either resigned or were put on leave without pay.

Queries sent to Jialun Li, one of the directors of Club Factory’s India subsidiary Futuretimes Technology Pvt Ltd, and founder and CEO Vincent Lou didn’t elicit a response. Ayush Singhal, Club Factory’s chief financial officer (CFO) in India around the time of the ban, did not take Business Standard's phone calls.

Small sellers left in the lurch

After Club Factory went 'missing', small sellers saw their financial risk intensify.

Since last year, many have complained of not being able to pay off their loans. Delhi’s Amit Singh Sengar, who sold personal care items on the platform, saw his business go under when Club Factory suspended its operations without settling his dues worth Rs 2.2 lakh. While he’s tried to pick up the pieces, other e-commerce platforms haven’t proven a good market.

One source put things into perspective. “Amazon and Flipkart have built a heavy inventory of international and noted Indian brands in every product category. So small sellers dealing in sub-par brands saw Club Factory as an option. Hence, despite getting burnt in financial dealings with Club Factory, sellers couldn’t keep away from the platform.” the source said.

The focus on creating a market for products from India’s small and medium enterprises (SMEs) proved fruitful. Between October and December 2019, Club Factory was the most downloaded shopping app in India. In January 2020, the company said it had 100 million MAUs, with 30,000 sellers across the country. Around the same time, Amazon India’s apps had 140 million MAUs, while Flipkart’s marquee shopping app had 108 million. Club Factory was targeting to reach 100,000 sellers before things began unravelling.

In February, Bengaluru Police registered an FIR against Club Factory and its directors Jialun Li and Garvit Aggarwal for delivering fake products.

This year, accusations against Club Factory continue to pile up. In March, two Indian BPO companies Cyfuture and Aegis, which provided customer support services to Club Factory, filed a case in the Delhi High Court to recover Rs 5 crore in dues.

A source claimed at least 100 sellers have been left in the lurch after Club Factory’s departure. Sellers pegged the figure at over 1,000. It was not possible to ascertain the exact number of sellers waiting on payments from Club Factory. AIOVA seems to have given up the cause. Last year, around the time of the ban, the Association told this writer that it hadn’t collated data on the number of affected sellers and their total pending dues. A year later, the Association still doesn’t have any data or even an estimate. It said its legal case against Club Factory couldn’t go through because sellers had withdrawn their consent due to fear of repercussions but didn’t elaborate further despite repeated requests.

Meanwhile, sellers’ testimonies suggest that the damage has been huge. Many lack the wherewithal for pursuing legal action. The Chinese company, which has hired Delhi-based law firm Khaitan and Co as its counsel, may have already minimised the damage.

**Force Majeure is a common clause in contracts which states that in unforseeable circumstances, parties to the contract can be temporarily freed from their obligations. 

In the past, Club Factory was also found to be misusing the provision that allowed duty-free imports of ‘gifts’ priced below Rs 5,000 into India. Club Factory and Shein — another Chinese ecommerce platform — would label their orders as ‘gifts’, avoiding any custom duties. To avoid exploitation of the provision, the Director-General of Foreign Trade (DGFT), in December 2019, banned the import of goods as ‘gifts’, with life-saving medicines and ‘rakhis’ being the exceptions.