The Impact of the Proposed Revamp of E-commerce Rules in India

by , | Jul 2, 2021

On 21st June, 2020, the Indian government issued draft rules to amend the Consumer Protection (E-Commerce) Rules, 2020.

On June 21, 2020, the Indian government issued draft rules (the “Draft Amendment”) to amend the Consumer Protection (E-Commerce) Rules, 2020 (the “E-Commerce Rules”), which were introduced in July 2020. The Draft Amendment been issued against a backdrop of complaints made by consumers and sellers operating on e-commerce platforms on the manner in which e-commerce entities conduct their business in India.

In this update, we discuss the key changes that have been proposed and their likely effect on e-commerce entities, sellers and consumers.

Regulation of anti-competitive practices

The Draft Amendment proposes to introduce a slew of measures aimed at regulating the seemingly anti-competitive practices often adopted by e-commerce entities in India. The proposed changes include:

• The definition of e-commerce entities will include related parties of e-commerce entities and any entity engaged in the fulfilment of orders on the e-commerce platform.

• E-commerce entities will have to ensure that their related parties and associated enterprises: (i) are not enlisted as sellers on the e-commerce platform; and (ii) do not undertake any actions which the e-commerce entity cannot itself undertake.

• E-commerce entities will be prohibited from organizing any flash sales, i.e., heavily discounted sales for pre-determined periods, which involve the use of back-end IT mechanisms to benefit specific sellers.

• Marketplace e-commerce entities will have to ensure that sellers do not use the brand name of the entity for promotion or sale of goods or services on its e-commerce platform.

• E-commerce entities will have to ensure that sponsored listings of goods and services are distinctly identified with clear and prominent disclosures.

• In line with India’s competition law regime, e-commerce entities holding a dominant position in any market will be prohibited from abusing their position.

• Service providers offering logistics services on behalf of a marketplace e-commerce entity will have to ensure that they do not provide any differentiated treatment between sellers of the same category.

• Marketplace e-commerce entities will be prohibited from selling goods or services to sellers registered on their platform. Further, such entities will also be prohibited from advertising to a body of sellers for the purpose of subsidizing a sale.

In the recent past, e-commerce entities in India have adopted innovative ownership structures and various other practices to provide benefits to specific sellers on their platforms. These practices hinder competition, limit customer choices, manipulate prices and prevent a level-playing field. The extensive changes proposed by the Draft Amendment will go a long way in putting a stop to these practices.

Increase in compliance obligations

Every e-commerce entity intending to operate in India will mandatorily have to register with the Department for Promotion of Industry and Internal Trade (the “DPIIT”) and obtain a registration number.

Separately, every e-commerce entity will also be required to appoint a: (i) Chief Compliance Officer to ensure the entity’s compliance with the requirements of the Consumer Protection Act, 2019 and the E-Commerce Rules; (ii) nodal contact person to coordinate with law enforcement agencies and officers, and to ensure the entity’s compliance with their orders; and (iii) Resident Grievance Officer to redress consumer complaints. Each of these appointees will be required to be an Indian citizen and resident. Further, e-commerce entities which are organised as limited liability partnerships or partnership firms and were previously not required to appoint a nodal contact person, will also be required to appoint such nodal contact person.

The new obligations are similar to the obligations under the recently introduced Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (the “Intermediary Guidelines”). While imposing liability for compliance on specific persons is bound to increase accountability, the requirement to mandatorily register with the DPIIT will increase the compliance burden for e-commerce entities.

Data privacy and security

The Draft Amendment proposes to make applicable several aspects of the Information Technology Act, 2000 and the recently introduced Intermediary Guidelines to e-commerce entities. These changes seek to regulate both, the manner in which e-commerce entities utilize consumer data and the cooperation offered by e-commerce entities to government agencies. The proposed changes are as follows:

• E-commerce entities will be prohibited from disclosing any consumer information to any third party without the express and affirmative consent of the consumer.

• E-commerce entities engaged in cross-selling of complementary goods and services will have to disclose the name of the entity providing data to the e-commerce entity to enable such cross-selling and the data used by the e-commerce entity for such cross-selling.

• Upon receipt of an order from a government agency, an e-commerce entity will have to provide the agency with the information available with it within seventy-two (72) hours for the purposes of: (i) verification of identity; (ii) prevention, detection, investigation, or prosecution, of offences; or (iii) cyber security incidents.

In recent years, the rise in digital interactions has created a new environment for exchange and misuse of personal data. The proposed changes are aimed at protecting consumer data against misuse and are a step in the right direction. At the same time, the changes also reflect the Indian government’s endeavour to protect its own access and control over the digital actions of Indian residents. In an era where Indian residents are clamouring for a safe digital environment, in our view, a comprehensive data protection regime, rather than standalone and restrictive obligations in dispersed legislations, will be a more effective measure to ensure that India keeps pace with the evolving digital economy.

“Fall back liability” imposed on e-commerce entities

The Draft Amendment proposes to introduce the concept of fall back liability for e-commerce entities. In instances where a registered seller causes a loss to a consumer on account of a: (i) failure to deliver goods or services due to negligent conduct; or (ii) failure to fulfil its duties in the manner prescribed by a marketplace e-commerce entity, the e-commerce entity will also be held liable for the loss caused to the consumer.

Indian courts have directed e-commerce entities to step-in in several instances of customer losses in the past. However, the lack of a legislative obligation often hinders an average consumer from successfully pursuing his/her rights. The proposed change is likely to be welcomed by consumers, as currently, e-commerce entities shrug off any liability by directing a dissatisfied consumer to the seller providing the goods or services to resolve any grievance.

Protection of domestic products

The Draft Amendment requires all e-commerce entities offering imported goods to identify goods on the basis of their country of origin. It also requires e-commerce entities to display notifications regarding the country of origin at various stages of a purchase by a consumer. Further, in case of imported goods, e-commerce entities will be required to suggest domestic alternatives to ensure fair opportunity for domestic products and ensure that their ranking parameters do not discriminate against domestic goods and sellers.

Conclusion

The Draft Amendment is consumer focused and aimed at creating a level-playing field for participants in the e-commerce market in India. At the same time, it will significantly increase the compliance burden for e-commerce entities. For instance, despite essentially acting as intermediaries, marketplace e-commerce entities will have to actively ensure that registered sellers and logistics service providers comply with their obligations. Additionally, e-commerce entities will also be burdened with the responsibility of protecting and promoting domestic products.

In our view, any regulation must remain mindful of the fact that these entities are private profit-driven enterprises. While the Indian government has publicly advocated a light-touch regulatory approach to governance, the Draft Amendment will have a huge impact on the manner in which e-commerce entities operate in India. Given this, the stakeholders impacted by the Draft Amendment will have some opposition to it in the current form.

Akil Hirani, Managing Partner - Tax, Corporate/M&A, Joint Venture, Private Equity

Akil Hirani is one of India’s leading corporate lawyers having more than 25 years of experience. Currently, he is the Managing Partner at Majmudar & Partners, a leading Indian law firm, and also heads its transactions practice. Mr. Hirani combines superlative Indian law acumen with an international skill set and has been ranked as one of the most in-demand lawyers in India by Chambers Asia.

Rahul Datta is an Associate at Majmudar & Partners.

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