Ajit Balakrishnan: Internet law - skirmishes ahead

As the new ecommerce paradigm works its way through multiple sectors of the economy it is likely to encounter legal challenges

The only time business executives like me meet lawyers is when some business associate makes us mad because of some imagined or real transgression of theirs or, vice versa, when a business associate gets mad at us for some imagined or real transgression of ours. So, it was a pleasant experience, earlier this week in Delhi, to sit in a room of about a hundred lawyers and conjecture together the state of Indian laws as they apply to the internet and ecommerce.

There was, as expected, the usual wonderment of some people about the "valuations" that fledgling ecommerce start-ups get, how enterprises run by people barely out of their teens and making large losses could attract eye-popping valuations from apparently sane private equity investors. I was tempted to refer such people to the work of economist Carlota Perez who, in her book, Technological Revolutions and Finance Capital, offered a scholarly explanation for such apparently irrational behaviour of investors by pointing out that this has been going on for more than a hundred years. Thus, when a new economic paradigm such as the steam-driven railway engine arrived in 1845, financiers took large bets on its potential and such large bets provided the money to make the new paradigm work: many private railway companies were floated in the London Stock Exchange to raise capital for the cost of buying the right-of-way to build railway tracks, the cost of railway stations, the cost of steel for the rail and the cost of the engines and coaches. Such was the exuberance that it was called "rail mania". Not surprisingly, the wild valuations of the railway companies could not last and many collapsed, but the railway system got built. Similar manias happened when building canals was all the fashion and, more recently, in the 1997-2000 period when the telecom sector was booming and was called the "dot com mania". All such manias see the influx of many players and when the inevitable crash happens, a few remain to prosper - but more importantly, the infrastructure for the new paradigm gets built.

What I did point out was that there are a number legal skirmishes that lie ahead of us as the new ecommerce paradigm works its way through multiple sectors of the Indian economy.

The first skirmish is already under way as multiple retail trade associations have approached courts for relief from the relentless onslaught that their business face from the new e-retailing start-ups. The bigger picture behind this is that India has a multi-tiered distribution system for consumer goods, particularly for consumer electronics. Goods flow from a manufacturer, usually in China, to an importer in India, from there to a wholesaler in each of our big metro cities, onward to town level distributors and finally to multiple small retailers in each town. In this process, a total markup of up to 20 per cent on factory prices is common. The new ecommerce companies and their investors see a great opportunity in this juicy 20 per cent margin by bypassing many levels in this chain and selling directly to consumers. The only problem is that this "inefficient" distribution structure is a means of livelihood for about 25 per cent of our working population and a political push back against these ecommerce companies may come sometime soon.

Then there is the impending skirmish in the area of Competition Law. India, like many other countries, has been struggling for years on how to deal with companies that dominate some markets and then behave unfairly with consumers and others. The Monopolies and Restrictive Trade Practices (MRTP) Act, passed in 1969 to deal with this, loosened a little bit in 1991, and was replaced by the Competition Act 2002. In the MRTP era just being dominant in a market was considered ugly; under the new act, you must act like a monopolist to be considered ugly. The problem is that many "Information Markets" exhibit a winner-take-all tendency. India, and the world, has to figure out how such winner-take-all processes (called "Network Effects" by scholars) work and which parts of it amounts to "acting like a monopolist".

Then there is a conceptual skirmish ahead: the superstructure of our internet and ecommerce industries is built on Section 79 of the Information Technology Act 2008, which gave birth to the concept of the "Information Intermediary". (I wrote that section personally as a member of the expert group and had to assure some sceptical civil servants, to "trust me" to see it through). Defence against a liability under this section crucially relies on the concept of the "due diligence defence". Under this concept, if you can demonstrate that you have taken reasonable steps to avoid a prohibited event, then you have protection from liability. For example, when an ecommerce marketplace displays a product listed there by a merchant, it has no liability for, say, a defective product sold, if it can demonstrate that it has received an undertaking from the merchant that they would list only high-quality and non-defective products and that it continuously educates it people and its merchants' people about this process. I spent that morning in Delhi quizzing the assembled lawyers on whether or not there is any part of Indian law that sanctifies "due diligence defence", but did not get a clear answer.

Ajit Balakrishnan is the author of The Wave Rider, A Chronicle of the Information Age
ajitb@rediffmail.com