New Delhi: A Rs 2,199 watch available for Rs 247. An air purifier worth Rs 32,995 for Rs 23,999. Branded shoes at 60-80 per cent off, and an inverter worth Rs 9,995 at Rs 4,499. The Diwali sales offered by e-commerce giants Amazon and Flipkart draw thousands of breathless customers looking to score sweet deals on a whole range of essentials as well as indulgences.
The same deals have now brought the companies under the government’s scanner over alleged “predatory pricing”, a controversial business practice where a player offers massive discounts to mitigate competition.
Last week, Union Commerce Minister Piyush Goyal assured action against Amazon and Flipkart if the two companies are found guilty of the practice. The two companies have reportedly notched up sales of over $3 billion in their festive sales this month.
According to reports, the government has sent detailed questionnaires to both e-commerce platforms, which are owned by Americans.
“E-commerce companies have no right to offer discounts or adopt predatory prices. Selling products cheaper and resulting the retail sector to incur losses is not allowed,” Goyal was quoted as saying.
While the government awaits their response, ThePrint explains the laws the websites may have flouted with the discounts.
What is predatory pricing?
While Amazon is a US-based company, Flipkart, founded by Indians, is majority-owned by American giant Walmart.
Both follow the marketplace model of e-commerce, which means they connect sellers and buyers instead of selling their own wares. This is the only type of e-commerce where foreign investment is allowed in India.
Under FDI rules that kicked in this February, they are also barred from striking contracts with private companies for exclusive sales of certain items, for example, the OnePlus-Amazon partnership, and offering discounts.
Even so, Flipkart and Amazon, apart from other e-commerce portals, have often been accused of indulging in predatory pricing owing to the deep discounts they offer.
Before the new FDI rules took effect, these platforms were accused of buying products in bulk from manufacturers at heavy discounts, and then selling them at lower costs to entities where they had a stake. These entities would then reportedly sell these products on the e-commerce platforms at lower costs.
Costs were allegedly brought down further by waiving the delivery fee and via cashbacks, often on their own payment portals like Amazon Pay.
Since such practices are seen as inimical to the functioning of brick-and-mortar stores, the new FDI guidelines barred e-commerce entities from “directly or indirectly” influencing the price of goods and services.
It also tasked the companies with ensuring a “level-playing field”. In order to emphasise this, it stated that cashback or other services such as quick delivery should be applicable to all vendors on these platforms.
The policy required e-commerce platforms to realign their business structures to ensure compliance. A draft analysis by PwC, in fact, predicted that the revised policy could cause a $46 billion fall in online sales by 2022.
However, experts have been of the opinion that price-influencing is a competition issue rather than an FDI issue.
“FDI is the wrong place to regulate marketplace or anti-competitive behaviour,” Nikhil Narendran, a partner at India-based law firm Trilegal was quoted as saying. “Deep discounts by itself are not bad as long as they are not harmful for the consumer. Free market, competition, and innovation benefit the consumer.”
What about the Competition Commission of India?
Before the new FDI policy took effect, the Competition Commission of India (CCI) — the watchdog for anti-competitive practices in India — had absolved e-commerce platforms of indulging in anti-competitive practices.
For instance, in Ashish Ahuja v Snapdeal.com, the CCI noted that the e-commerce market “thrives on special discounts and deals”.
It had then ruled that while Section 4 of the Competition Act 2002 does prohibit predatory pricing, the discounts offered would not be illegal since Snapdeal was not a “dominant player” in the relevant market.
A market player is said to enjoy a dominant position when it can function independent of its competitors, customers and others, to take unilateral decisions.
However, with the growing concern over predatory pricing, the CCI is planning to issue a “soft policy advisory” for the e-commerce industry.
The commission has also initiated a study on e-commerce to gather information and insights from market participants in goods and services for various sectors like mobile phones, grocery, food, electronic/electrical appliances, lifestyle and hotels.
CCI chairperson Ashok Kumar Gupta told The Economic Times last month that deep discounts make a business “unviable” as it reduces the value of products and services in the eyes of the consumer.
Following written complaints by the brick-and-mortar retailers lobby, the Confederation of All India Traders (CAIT), the CCI also told Goyal that it will keep a close watch on these deep discounts.
Draft e-commerce policy
The Department for Promotion of Industry and Internal Trade also released a draft e-commerce policy in February, but this focused on setting up a legal and technological framework for restrictions on cross-border data flow.
The policy did propose prohibiting e-commerce marketplaces from adopting business strategies that favour one or few sellers/traders, and a more comprehensive version is expected in 2020. However, the government has clarified that there will be no changes in the FDI rules in the sector.
In August this year, the Ministry of Consumer Affairs, Food & Public Distribution released ‘E-Commerce Guidelines for Consumer Protection 2019’ to protect the rights of online customers. These guidelines make it the e-commerce platform’s responsibility to maintain a “level playing field” and to ensure that it does not “influence the price of the goods or services”.
Meanwhile, the US government has reportedly voiced its concerns over the new FDI rules for e-commerce, and pushed for the regulation to become a bilateral issue.