India: The Draft e-commerce Policy Will Strangle Industry's Growth

Last Updated: 17 September 2018
Article by RV Anuradha and Piyush Joshi
  • In the year 2018, the Draft Policy is suggesting a plan similar to what was implemented, and failed, for the "physical" economy from 1950s right until 1990.
  • The Draft Policy suggestion to tinker with established corporate law principles to allow "founders to have control over their e-commerce companies, despite having small shareholding" shows a remarkable nonchalance for established corporate law principles.
  • The Draft Policy runs the risk of discouraging foreign investors, which will only result in India being knocked down in the international business ratings.

"What is the Matrix?" a baffled Neo (played by Keanu Reeves), asks of Morpheus (Laurence Fishburne) at the beginning of their meeting in the cult classic The Matrix.

The present draft National E-Commerce Policy achieves Neo's level of initial bafflement and perplexity with the Matrix, in relation to "e-commerce" and the "digital economy".

The Draft National Policy Framework grapples with these concepts throughout its text. However, unlike Neo in The Matrix, the Draft Policy does not eventually morph into "The One" saviour, but rather remains as a large entangled web of suggestions that do not seem to achieve any of the stated objectives.

The Draft Policy, which after describing a number of goals and moving through a large number of concepts and repeatedly stating that it wants to "spur digital innovation" and "stimulate the digital economy", settles on the way forward through "a single legislation to address all aspects of e-commerce" and creation of "a single regulator" that would address issues ranging from consumer protection to competition to FDI in the e-commerce sector.

Elsewhere in the Draft Policy, it also refers to the need for creation of a "Central Consumer Protection Authority" (CCPA) which will address not only issues relating to consumer protection, but also inter-ministerial coordination on all aspects of e-commerce. But it is not clear whether the single regulator proposed is the CCPA or a separate e-commerce regulator which the policy envisages will oversee the entire segment of "e-commerce", including FDI, consumer protection, payment mechanisms on e-commerce platforms, etc.

This must give one pause to contemplate; because creation of a centralised regulatory framework is what was imposed on the "physical" economy in 1950s through the Industries (Development and Regulation) Act, 1951 (for industries) and the Agricultural Produce Marketing Committees (APMC) (for agriculture), both of which were initially constituted as welfare measures for bringing about level playing fields.

Needless to say, these centralised regulatory frameworks only strangled India's growth and held it back for decades and culminated in the economic crisis of 1990. Now in the year 2018, the Draft Policy is suggesting a plan similar to what was implemented, and failed, for the "physical" economy from 1950s right until 1990.

E-Commerce Growth in India today

The IBEF estimates that online retail sales in India are expected to grow by 31 percent to touch $32.7 billion, led by Flipkart, Amazon India and Paytm Mall — each of which are entities with significant foreign investments.

It seems that after much deliberation the Draft Policy is suggesting that the growth of not only the online retail sector but the entire "digital economy" should be regulated and brakes applied to ensure "level playing field" for "domestic innovation".  However, there is nothing in the Draft Policy that would result in this stated objective.

It is also a matter of fact that Flipkart and Paytm, which were started by domestic Indian players, have flourished and grown because of the regulatory framework that allowed the flow of significant amounts of foreign investments which is so essential for the continued growth of the sector.

Any reversal of this trend will simply disincentivise foreign investments. It is also a matter of fact that domestic capital continues to be far more expensive than foreign sources of capital. 

How to achieve Indian control

The Draft Policy suggests tinkering with established corporate law principles to allow "founders to have control over their e-commerce companies, despite having small shareholding".

This shows a remarkable nonchalance for established corporate law principles, which even today allow for differential voting structures and affirmative votes for specific shareholders in critical aspects of decision making.

The extent to which a promoter/founder can leverage this depends on a variety of aspects ranging from its own net worth, and negotiating prowess.

The Draft Policy's prescription that such entities be allowed flexibility to list shares and bonds, without any discussion on the rationale for such checks being stipulated for entities that seek to raise monies from the public, will likely result in frauds equivalent to "chit funds" and "ponzi" schemes to run rampant in "digital economy", under the garb of promoting the "Indian control".

Competition in E-Commerce

The Draft Policy also calls for Competition Commission of India to lower the merger thresholds so that mergers of even lower values would require CCI prior approval.

Amendment of competition thresholds in themselves, however, is not the answer, and in fact will signal a reversal of easing businesses for entities entering India. What is instead required in the context of mergers and acquisitions in the digital space, is an understanding of rules of competition relevant for companies that deal with data, and impact of data sharing.

For instance, the reason that the Facebook-Whatsapp merger escaped competition scrutiny in most jurisdictions is not because of low merger thresholds; but because of the lack of appreciation of the voluminous data sharing that would occur between both entities.

When this fact became apparent, the EU DG Competition imposed a strict penalty on Facebook for not disclosing this aspect, and additionally, privacy investigations are also ongoing.

Another aspect relevant from a competition perspective is that of pricing. The Draft Policy recommends "a sunset clause, which defines the maximum duration of differential pricing strategies (such as deep discounts) that are implemented by e-commerce platforms to attract consumers".

There is no criteria or basis for such a suggestion.

Aggressive price competition is the hallmark of truly competitive markets. But at the same time, rules of Indian competition law recognize the importance of addressing Predatory Pricing (PP).

Simply explained, PP is the practice of driving rivals out of business by selling at a price below the cost of production, and when the latter have been successfully expelled, the predator raises the prices again and reaps the rewards.

The issue of discounted pricing needs to be viewed from the lens of whether there is indeed PP, or fair competitive pricing of a fierce competitor that is actually benefiting consumers and forcing other firms to be more competitive.

Clearly, the pricing for e-commerce sales and physical retail stores cannot be compared since e-commerce entities have a significant price advantage over physical stores.

The focus should therefore be an evidence-based approach to understanding how discounts impacts e-commerce players and whether principles of competition law as they exist can address this; rather than simply stipulating price regulation in an era of liberalization.

Data Storage in India

The Draft Policy suggests creating infrastructure for data centres in India and links this to a sunset provision of two years at the end of which it will be mandatory to hold all data generated by users in India within India.

Incentivising the development of large data centres is a welcome move; but the policy rationale for storage of all Indian data in India is not clear, since storage in India does not automatically ensure security of the data.

Instead the focus should have been on enforceable obligations of e-commerce players to ensure privacy and security, which is expected to be achieved under the Personal Data Protection (PDP) Bill proposed by the Justice Srikrishna Committee.

While the draft PDP Bill as of now has several infirmities which have been discussed in another article for this platform, this aspect needs to be addressed under the rubric of Data Protection, and not as a separate requirement for e-commerce entities.

If the policy objective is to make India an attractive destination for establishing data centres, then the Draft Policy on e-commerce should instead have been on how to address the infrastructure requirements for creating large international grade internet data centres, which will need, among various aspects, (i) assured 24x7 electricity supply at a specified quality (i.e. no fluctuations), (ii) high levels of assured bandwidth, (iii) security of construction, including resistance to explosives and bombs, (iv) various clearances, (iv) large land requirements and (v) high level of security, access control and related regulations.

Centralised or Distributed Control?

One of the more ironic suggestions of the Draft Policy is its suggestion to use "blockchain technology" for "furthering financial inclusion" and that this is needed "for deeper spread of e-commerce in the country".

For a Draft Policy propagating centralised control over the "digital economy", to, at the same time, recommend the use of "blockchain technology" is baffling.

The report of the committee constituted by the RBI to review financial technologies ("FinTech"), explains block-chain as a distributed ledger. "Distributed ledger technologies (DLT) provide complete and secure transaction records, updated and verified by users, removing the need for a central authority."

It further explains that One of the best-known applications of Block chain technology at the present time is bitcoin. (Transactions in this virtual currency are largely anonymous. This creates ethical risks for financial institutions dealing with users of this currency, because they are unable to (fully) verify their identity.")

Clearly, there needs to be more dialogue and discussion on whether the approach required is centralised or distributed, and the ways in which potential risks of blockchain can be managed, rather than simply recommend its use as a solution.

Although the Draft Policy seems to have taken a few paragraphs from the RBI's FinTech Report submitted in November 2017, it fails to take the main recommendation in relation to regulation of such technology into consideration which is "The regulatory actions may vary from "Disclosure" to "Light-Touch Regulation & Supervision" to a "Tight Regulation and Full-Fledged Supervision", depending on the risk implications".

Misplaced Nostalgia?

The Draft Policy appears to be inspired by nostalgia for the central planned economy era of the 1950s to 1990, which has been proven to have had its limitations on growth and development.

It is now over 20 years since liberalisation of the Indian economy commenced, and India is also fast emerging as the destination for significant investments in the e-commerce space.

The Draft Policy runs the risk of reversing this trend by discouraging foreign investors, which will only result in India being knocked down in the international business ratings in which it has just managed to crawl up to the 100th position from languishing around the 130s level.

Digitisation and transfer of physical ways of transacting into the digital space, has had a transformative impact on the ways in which businesses can be done. What we need is a facilitative environment that can attract and retain investors and investments, and encourage innovation that can further enable growth of the sector.

Regulatory accountability is crucial; but regulatory control to scuttle growth and expansion certainly seems counter-productive to the entire vision of digital growth.

Originally published by CNBC TV18, August 2018


Piyush Joshi and RV Anuradha are partners at Clarus Law Associates, New Delhi.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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