New e-commerce rules may be prone to manipulation, work-arounds: Experts

The fresh attempt at regulating the e-commerce sector in India, whilst well-intended, leaves scope for work-arounds and potential manipulation, experts and industry observers say. The new rules are mildly-worded and majors players, like the previous instances, may be able to get around them with only minor tweaks to their business models and subsidiary ownerships structures. The legal teams are already at work.

The biggest (high-impact) change is the clause that debars a seller that has ownership by the e-commerce marketplace, or any of its “group companies”, from selling on the said e-store. This puts ventures like Cloudtail and WS Retail, affiliates of Amazon and Flipkart respectively, in jeopardy.

However, the details are of significant value here.

The rules say the said seller must not have “equity participation by e-commerce marketplace entity or its group companies”, but does not define ‘group companies’. Cloudtail is a joint venture between Amazon.com Inc. and Narayan Murthy’s family office Catamaran Ventures. It could be argued that Amazon India Pvt Ltd, which operates Amazon.in, is not directly linked to Amazon.com, the US firm. Regulatory filings show the ownership of Amazon India by a web of holding companies, outside the US and India, which, at top end of the structure are owned by Amazon.com Inc.

In any case, if Amazon.com Inc forgoes its stake in Cloudtail, it will still be excruciatingly difficult to audit whether Amazon continues to exert influence on the business or not.

A similar regulatory complication exists in the business-to-business (B2B) wholesale operations of e-commerce firms. New rules say that in the case of an online seller procuring over 25% goods from the e-commerce firm’s wholesale arm and selling on the same e-store, the e-commerce firm will be deemed as working on an inventory model, (which is not allowed) and forced to roll back.

Again, Amazon’s B2B firm, Amazon Wholesale (India) Pvt. Ltd, is owned by Amazon.com Inc, and it’s likely to be argued that Amazon.com and Amazon.in, the Indian e-commerce site, are technically two different entities.

The new rules again fall short of a well-rounded policy, said Arvind Singhal, the founder of Technopak, a consultancy for consumer products and retail sector.

“Several points in the (new) policy are non-sensical, if I may say so. What is deep discounting- is 50% discounting deep and 30% not deep? And what is meant by the point that every seller must get equal treatment. This goes against the very tenant of commerce. Each supplier and buyer have preferential relationships based on strategic reasons,” said Singhal

Since the start, the government has resolutely been behind not allowing foreign-owned e-commerce firms from holding inventory. This, it was believed, will deter large companies from influencing pricing and the market. But work-around were figured and put to use.

Today, major e-commerce firms allow sellers to place their goods at the marketplace-owned warehouses for a fee. It’s a ‘warehouse-as-a-service” model, and technically complaint with the rules. But the e-commerce firm still gets to ‘suggest’ the seller potential inventory to maintain, demand forecast and the price to sell at.

E-commerce firms have also sprung up distribution arms, where say a Flipkart India Pvt. Ltd, procures good and sells them to vendors that in-turn sell on the e-commerce site (Flipkart, in this case). Here is where, it is believed, that discounts are cooked up. The margins at which the B2B ventures sell to online vendors ultimately determines the discounts the online vendor is able to offer.

Another expert, who did not wish to be quoted, pointed out that the draft rules do not outline a penalty in instances of violation. “Without a penalty, and details on a mechanism on how such cases will be taken up and tried, it’s hard to see how there will be a meaningful change,” this person said.