The Ministry of Consumer Affairs, Food and Public Distribution had recently issued, and invited public comments on, the proposed amendments to the Consumer Protection (E-Commerce) Rules, 2020 (the Rules) which inter alia, seek to regulate the conduct of e-commerce entities. We have provided below a detailed analysis of the proposed amendments along with our recommendations.
A. Scope and applicability
Rule 2(1)(a) of the Rules provides that the Rules would apply to ‘all goods and services bought or sold over the digital or electronic network including digital products’. There is no reference to ‘consideration’ under the Rules. The Consumer Protection Act, 2019 (the COPRA), however, in the definition of the term ‘consumer’ mentions consideration as having been ‘paid or promised or partly paid and partly promised’. Moreover, jurisdiction (of the national and state commissions) under the COPRA is determined on a pecuniary basis i.e., depending on the value of goods and services being paid as consideration. Accordingly, it seems that COPRA only covers instances of sale of goods or supply of services involving monetary consideration. As a result, consideration ought to be read into the applicability of the Rules as well. The purported intent of the Rules is primarily to govern e-commerce entities. However, the business model of marketplace e-commerce entities is such that they do not charge a fee or consideration to the consumers for the services provided by them.
Further, a lot of the services being provided by certain e-commerce platforms are, on the face of it, available ‘free of cost’ and are provided without any monetary consideration. These platforms include music and video streaming websites (such as, the ad-supported versions of Spotify, Gaana, YouTube) or e-mailing platforms (such as, Gmail or Yahoo!). Therefore, it is unclear how, and whether, such e-commerce platforms would be captured within the Rules. In certain cases, the same platform has two versions, viz. premium version which has a periodic subscription fee and an ad-supported version which does not. Is the intent that the premium version will be subject to compliance with the Rules but the ad-supported version would not?
These platforms are largely supported by the revenue earned via advertisements. It is evident that the price or consideration being paid for these ‘free services’ is technically the consumers’ personal data. Therefore, it is important to take into consideration the concept of goods being “bought and sold” in respect of the unconventional online markets that are based on zero-price business models.
It would, therefore, be helpful to clarify: (1) how ‘consideration’ has to be construed under the Rules; and (2) the applicability of the Rules to services that are availed of ‘free of cost’ by consumers on certain e-commerce platforms.
(i) E-commerce entity
The proposed amendment to the definition of ‘e-commerce entity’, under rule 3(b), includes any ‘related party’ (as defined under section 2(76) of the Companies Act, 2013). Inclusion of related party would widen the ambit of an e-commerce entity to a large extent as an investor holding a negligible stake in an e-commerce entity could also potentially be covered within this definition (especially in light of how an ‘associated enterprise’ has been defined under the Rules).
Accordingly, a lot of the companies may have to comply with the Rules just by virtue of being a ‘related party’, even though they may not necessarily be operating in the e-commerce space. In this regard, an objective threshold should be adopted for related parties whereby only such entities that may be operating in the same or similar line of business as the e-commerce entity would be captured within the ambit of this definition.
Moreover, within the definition of an e-commerce entity, the proposed amendment seeks to include any entity engaged by an e-commerce platform for the purpose of ‘fulfilment of orders’ placed by a user on its platform. An e-commerce platform may engage various entities such as, logistics service providers, payment solution providers, call-centers etc. for the purpose of fulfilment of orders placed on their website. It is unclear whether all such entities (some of which may not even have an e-commerce platform or even a website) could potentially be considered to be an ‘e-commerce entity’. If that is indeed the case as the current drafting suggests, the scope of an ‘e-commerce entity’ gets widened manifold. Accordingly, the scope of entities (engaged by an e-commerce platform for the purpose of fulfilment of orders) that may get covered under this provision should be clarified.
(ii) Fall-back liability
Rule 3(d) provides for the liability of a marketplace e-commerce entity where a registered seller fails to ‘deliver the goods or services’ ordered by a consumer due to, inter alia, negligent conduct of the seller which ultimately results in a loss to the consumer. The rule, at present, suggests that only failure to deliver goods or services would be caught within the ambit of this rule but not supply of defective goods or deficient services. Further, since the marketplace e-commerce entity cannot presumably sell substitute goods in lieu of the goods that were originally ordered by a consumer, it is unclear whether the nature of the fall back liability would just be monetary or whether it could include specific performance as well.
(iii) Flash sale
A flash sale typically means a sale organized by an entity for a short period of time (usually for a window of a few minutes or hours) to sell particular products (often including new launches).
Flash sales are appreciated by consumers who prefer buying, and get drawn to, such sales. Restrictions on flash sales could ultimately be counter-productive to the objective of consumer protection and could also undermine consumer choice and preferences.
However, if the intention is to prohibit flash sales that are organized fraudulently, the scope of flash sale under the Rules should be circumscribed. Currently the scope is very wide owing to the criteria for determining a flash sale i.e., ‘predetermined period of time’ and ‘otherwise with an intent to draw large number of consumers’. This could potentially include even non-flash sales i.e., seasonal sales organised by e-commerce platforms.
Moreover, the proviso to rule 3(e), inter alia, provides that flash sales that are organized fraudulently with an intent to enable specific sellers or a group of sellers ‘managed by an e-commerce entity’ to sell goods or services on its platform would be captured within this definition. In this regard, it is unclear as to what the criteria of being ‘managed’ by an e-commerce entity means – would this include related parties and group companies? If that is indeed the case, it is unclear how this provision would tie-up with rule 6(6) which casts an obligation on e-commerce entities to ensure that none of its related parties and associated enterprises are enlisted as sellers for sale to consumers directly. Accordingly, the scope of what “being managed” by an e-commerce entity means should be clarified.
Rule 3(k), inter alia, provides that mis-selling amounts to a deliberate misrepresentation of information to users by an e-commerce entity about the goods and services provided by such an entity.
The explanation to the rule lists the various scenarios of misrepresentation that could be captured within this rule. This also includes innocent misrepresentation (at sub-clause (iii) of the explanation) which seems to contradict the general definition of mis-selling which requires a ‘deliberate’ misrepresentation. The rule is, therefore, inconsistent on this aspect.
C. Registration of e-commerce entities
Rule 4 provides that every e-commerce entity which intends to operate in India shall register itself with the Department for Promotion of Industry and Internal Trade (DPIIT) within such period as prescribed by DPIIT for allotment of a registration number.
It is unclear as to what is envisaged as part of the registration process and the details or information that would be required to be provided as part of this process. It should be clarified whether the registration process would include a screening process of applicants or an eligibility test / criteria or if the process is simply for the purposes of maintaining a database. Moreover, it is unclear whether the registration will be valid for a certain duration or would it be perpetually valid. Lastly, it should also be clarified whether this provision would have retrospective effect and whether the existing platforms would also be required to get registered with the DPIIT.
D. Appointment of officers and grievance redressal mechanism
Rule 5(5)(a) requires appointment of a Chief Compliance Officer (CCO) who shall be responsible for ensuring compliance with the COPRA and the rules made thereunder. However, rule 5(1) provides for appointment of a nodal person of contact to ensure compliance with the said act and rules. It is not clear how the allocation of responsibilities will work between a CCO and the nodal person of contact.
Moreover, whilst rule 5(1) provides for the nodal person of contact to be a resident of India, rule 5(5)(b) requires the nodal person to be a resident of India and a citizen of India. The two provisions are, accordingly, inconsistent.
The proposed amendments require all e-commerce entities to appoint various officers such as, CCOs, nodal contacts persons, and grievance redressal officers. However, the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (the IT Rules) also cast the same obligation on social media intermediaries (which would include e-commerce entities). Moreover, it is unclear how the grievance redressal mechanism as laid down under rule 5(5)(d) of the Rules would work with the IT Rules since the same mechanism is stipulated under the IT Rules as well. For instance, a resident grievance officer is required to acknowledge a complaint within 24 hours under the IT Rules (as opposed to 48 hours as mentioned under the Rules).
In order to avoid any overlap and confusion amongst stakeholders, it would be important to harmonise the two legislations on these aspects, to the extent necessary.
Moreover, given the wide ambit of the definition of an “e-commerce entity”, a lot of the smaller and upcoming businesses may also be required to appoint CCOs and other officers. This could result in a significant increase in operational costs of such developing businesses. For the purposes of these requirements, perhaps a threshold based on number of users or the relevant sector (in which the e-commerce entity operates) could be adopted. Alternatively, the threshold could also be based on an e-commerce entity’s gross merchandise value. Accordingly, only those e-commerce entities which cross the threshold may be required to appoint such officers. For relatively sensitive sectors (that involve larger public interest) such as FinTech or healthcare, all platforms operating in such sectors may be required to comply with these requirements. However, a threshold may be adopted for e-commerce platforms operating in other non-sensitive sectors such as, the ones dealing in apparels, fashion accessories, household products, etc.
E. Norms regarding imported goods
Rule 5(6)(7)(b) requires an e-commerce entity to ‘identify goods based on their country of origin, provide a filer mechanism on their website and display notification regarding the origin of goods at the pre-purchase stage at the time of goods being viewed for purchase, suggestions of alternatives to ensure a fair opportunity for domestic goods’.
Whilst it is important to promote domestic goods, it is equally important to create a level-playing field for industry participants. The proposed rule is protectionist in nature and it could significantly undermine consumer choice and preferences. Therefore, in operationalizing such a rule, the Government should ensure that this rule does not result in being overtly discriminatory and in reduction of consumer choice.
Moreover, it is unclear how this rule would play out in practice. Whilst an Amazon or a Flipkart can display domestic alternatives for imported goods, it is unclear how content-based platforms such as Netflix, Hotstar, Amazon Prime Video, Spotify, etc. would fulfill this requirement – would they be required to show a domestic alternative for every non-Indian movie, series, or music being licensed on their platform?
In this regard, it would be helpful to clarify how this rule would be expected to be followed in practice by all e-commerce entities.
F. Obligations and duties of e-commerce entities
Rule 5(14)(a) provides that ‘an e-commerce entity shall not manipulate the price of the goods or services offered on its platform in such a manner as to gain unreasonable profit by imposing on consumers any unjustified price having regard to the prevailing market conditions, the essential nature of the good or service, any extraordinary circumstances under which the good or service is offered, and any other relevant consideration in determining whether the price charged is justified’.
The rationale for this provision seems reasonable as far as an “essential” good or service is under consideration. However, beyond that, this provision is subjective in nature and remains unclear on certain aspects, as explained below.
Any changes to the price of a good or service is dependent on various economic factors. These factors include, inter alia, dynamic pricing (such as, surge pricing, demand pricing or time-based pricing). The impact on price is essentially a function of demand and supply. E-commerce platforms run on algorithms which often amend prices based on such economic factors. These factors naturally impact or in other words ‘manipulate’ the price of goods or services. Rule 5(14)(a) seeks to impose a blanket restriction on e-commerce entities regarding ‘manipulation’ of the price of goods and services without taking into consideration such key economic factors. This rule takes away the ability of an e-commerce entity to rely on such general economic indicators to reflect pricing. It, therefore, becomes important to clarify the term ‘manipulation’ and adopt an objective criterion to determine the same as it is unclear whether a manipulation owing to such economic factors would also be covered within this rule.
Moreover, ultimately a consumer has the choice whether to buy the product or avail of the service. Any restrictions on amendments to prices of goods and services could potentially undermine consumer choice as well.
Further, for goods in particular, as long as any amendment to a price is within the maximum retail price (MRP), it is beneficial for the consumers. It is, therefore, unclear how placing restrictions on ‘manipulation’ or changes in price (so long as they remain below the MRP) would be favourable for the consumers.
(ii) Abuse of dominance
Rule 5(17) prohibits an e-commerce entity (which holds a dominant position) from abusing its dominant position in any market. The provision relating to abuse of dominant position is already covered under the Competition Act, 2002, and the Competition Commission of India (the CCI) has the jurisdiction to address any claims arising from abuse of dominance. There is, accordingly, an overlap with the competition regime on this aspect and it could potentially create confusion amongst stakeholders with respect to jurisdictional issues as well.
It would, therefore, be necessary to clarify within the provision that in case an e-commerce entity appears to be abusing its dominant position, such matters would be referred to the CCI.
(iii) Cyber security breaches
Rule 5(18), inter alia, casts an obligation on an e-commerce entity to provide information (under its control or possession) and assist the relevant Government agency during investigations of cyber security incidents. The Personal Data Protection Bill, 2019 also contemplates a similar provision.
It would, therefore, be advisable to clarify which of the two laws will take precedence.
(iv) Logistics service providers
Rule 6(5) provides that a logistics service provider of a marketplace e-commerce entity shall not provide differentiated treatment between sellers of the same category. This rule is unduly prohibitive as it restricts the ability of commercial parties to negotiate best commercial terms of contract between competing and often not similarly placed customers. Accordingly, the Government should provide some leeway and flexibility for parties to negotiate and agree on commercial terms for provision of logistics services.
Moreover, the proviso to the rule, inter alia, provides that the logistics service provider shall provide a description of any differentiated treatment which it ‘gives or might give between sellers of the same category’. However, the rule, as mentioned above, provides for a blanket restriction on any differentiated treatment. This proviso is, accordingly, inconsistent with the general prohibition under the said rule. It would, therefore, be helpful to clarify the scenarios in which differential treatment may be permitted.
(v) Related parties and associated enterprises
Rules 6(6)(b) and 6(6)(c) cast an obligation on an e-commerce entity to: (i) ensure that none of its related parties and associated enterprises are enlisted as sellers for sale to consumers directly; and (ii) ensure that nothing is done by related parties or associated enterprises which the e-commerce entity cannot do itself.
The Guidelines for Foreign Direct Investment on E-commerce provide that ‘an e-commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies’. However, the general prohibition under the Rules is inconsistent with the permissible limit of 25% as provided under the foreign direct investment (FDI) norms. Accordingly, it would be helpful to clarify how rules 6(6)(b) and 6(6)(c) dovetail with the FDI norms.
Moreover, the following criteria for determining ‘associated enterprises’ under rule 6(6) is very broad:
- Rule 6(6)(e) – where one enterprise holds, directly or indirectly, shares carrying the voting power in the related entities; and
- Rule 6(6)(g) – there exists between the enterprises, any relationship of mutual interest, as may be prescribed.
It is common for investors to have multiple investments, some of which may be in companies operating within the same sector. Whilst such investors may have ‘voting power’, they may not necessarily have a controlling stake in all such portfolio investments. The criteria highlighted above could potentially capture a lot of group companies, portfolio companies, related parties which could significantly impact the e-commerce entity’s operations. Perhaps a threshold based on number of users or relevant sector could be adopted for associated enterprises as well in order to limit the scope of the kind of associated enterprises that may be captured under this provision.
Further, rule 6(7) provides that no marketplace e-commerce entity shall sell goods or services to any person who is registered as a seller on its platform. In this regard, it is unclear whether a seller on an e-commerce platform would be unable to buy products from the platform itself. By definition, an e-commerce entity is essentially just providing a platform and is not indulging in selling goods. The rationale and scope of this prohibition is, accordingly, unclear and vague.
Whilst it is important to regulate the e-commerce space, it is equally imperative to ensure that such regulatory intervention is targeted, reasonable, proportionate, and does not impede innovation or the ease of doing business in India.
The introduction of the Rules is a welcome step. However, there is a lot of ambiguity with respect to the scope and practical implementation of some of the proposed amendments which will have to be clarified and amended (to the extent necessary) before being brought into force.
This material is for general information only and is not intended to provide legal advice. For further information, please contact: