Ecommerce mess: Why a convoluted regulatory regime has spooked investments and enterprises

On August 8, 2018, the Competition Commission of India (CCI) cleared the acquisition of Flipkart by Walmart. The government touted it as a large Foreign Direct Investment (FDI) in to India and everyone was euphoric. Walmart – the biggest bricks and mortar retailer was in India with a bang.

But, foreign retail is a restricted area for FDI in India, so what is Walmart here to do? Well, that’s where the ‘jugaad’ of Indian regulations come in to play. Flipkart is not a retailer, but a ‘market place’ and FDI is permitted in that sector. In fact, the CCI noted that the FDI Policy restricts the parties from engaging in business to consumer sales and thus, they are not engaged in the said segment. However, there is no restraint on the parties to offer an online marketplace platform to facilitate sales between retailers and consumers.

At the same time, the plight of retail industry on account of the online juggernaut was apparent to all. The Confederation of All India Traders made a vehement submission opposing the acquisition before the CCI. Whether organized or unorganized retailers – they were all affected by online retail. Indeed, in any other jurisdiction in the world, any competition analysis would have taken in to account the entire competitive landscape – online market place and bricks and mortar, as one clearly impacts the other.

Unfortunately, in the maze of the regulatory framework in India on retail the CCI side stepped the issue, while approving the Walmart acquisition of Flipkart. While the market was analysed for its horizontal and vertical impact, the CCI observed:
“During the inquiry into the matter, the Commission received representations against the Proposed Combination from trade associations,traders/retailers, etc., which besides expressing concerns on compliance of FDI norms by Flipkart; ‘predatory’ practices and preferential treatment to specified sellers in Flipkart’s online marketplaces; also expressed concerns on the impact of the Proposed Combination on employment, entrepreneurship, small and medium scale enterprises, retailing, etc.

The Commission notes that majority of the concerns expressed in the representations referred above have no nexus to the competition dimension of the Proposed Combination. Issues falling beyond the scope of the Act cannot be a subject matter of examination by the Commission, though they may merit policy intervention. . .

Based on the rationale above, the CCI concluded that the problems in the retail industry (if any) were not caused or likely to be caused by the proposed combination, and that was a policy issue, not within the purview of the CCI.

What is of concern to observers in this space is that the analysis of the vertical market was dealt with cursorily and the quick conclusion was that the impact, if any, pre-dated the proposed combination. The dust had seemingly settled, and bricks and mortar retailers remained under severe competitive pressure from online retailers.

On 26 December 26, 2018, the Department of Industrial Policy and Promotion (DIPP) amended the FDI Policy by issuing Press Note 2
of 2018 which made significant changes to the rules applicable to e-commerce entities with FDI, which, to a great extent address some of the concerns raised by trade associations. The changes can broadly be divided into two buckets – the first, which deal with ensuring that the e-commerce marketplace is a level playing field for all sellers and the second, which seek to clarify the position of sellers that have equity participation from entities operating the e-commerce marketplace (including their group companies).