India’s Proposed Ecommerce Policy Under Scrutiny

India’s Proposed Ecommerce Policy Under Scrutiny

April 4, 2019

The current draft ecommerce policy which seeks to provide a regulatory framework in India is generating a lot of heat. We discuss the positive and negative implications for domestic and foreign-owned companies in India.

By Kumar S

The primary criticism of the proposed policy is the Indian Government’s position to move ecommerce under the ambit of the digital economy. While the Government’s move is in line with its ambition to grow the digital economy to USD 1.2 trillion within the next 5-6 years, the policy calls for heavy regulations which critics argue are too restrictive.

The Government envisages a good part of its projected digital economy to come from the ecommerce sector. According to a Livemint report, the sector is pegged to reach USD 150 billion within the next three years; a four-fold growth from 2018.

Foreign companies including many US-owned organisations are lobbying hard to get many of the provisions watered down. A section of
stakeholders who are likely to be adversely impacted, once the policy is enforced, have cited a lack of clarity on the scope of provisions on sale, purchase, marketing and distribution of digital services.

Several foreign-owned companies with operations in India have also criticized the Government’s move to store data belonging to Indian consumers, inside the country. The companies have argued that the move will restrict free flow of data and kill innovation, thereby impacting the delivery of services. The claim is that setting up data centers in India will require huge infrastructure and incur recurring expenses, making business cost-prohibitive.

The Indian banking regulator – Reserve Bank of India (RBI) – has already enforced its April 2018 circular which mandates all financial data of Indian citizens, generated domestically, must be stored in India. It has been widely reported that the RBI has given some window to foreign companies to implement the rule, in phases, after the companies appealed the RBI to extend the October 2018 deadline.

While the RBI circular is applicable only to financial sector and is independent of ecommerce rules, more sectors may have to follow suit if the policy is implemented in its current form.

The draft policy has also made recommendations on other aspects of data governance including intermediary liability, consumer protection and cloud infrastructure. The policy also lays down rules on investments, intellectual property rights and competition.

It is being argued that the policy is likely to increase compliance burden on stakeholders. Foreign companies and lobby groups are arguing that the twin policy arrangements [draft ecommerce policy and FDI rules] would harm Indian startups; create entry barriers and stifle competition; discourage disruption and kill innovation.

Another strong criticism of the proposed policy is the provision which recommends the government to reserve a right to ask companies to disclose algorithms and their source code, according to a report by The Economic Times. It argued that this recommendation on ‘forced disclosures’ would give away trade secrets that is aimed at ‘technology transfer’ to India.

Through the policy, India also aims to arrest the problem of Indian entrepreneurs setting-up companies in other countries. The requirement to establish an Indian entity has also come in for some criticism.

FDI Tweaks

The draft ecommerce policy came on the heels of the Government’s tweaking of Foreign Direct Investment (FDI) rules. Tweaking of FDI rules have also ruffled some feathers.

Under the new rules, marketplaces have been barred from indulging in deep discounting and cashbacks. The tightening of norms is likely to hit big ecommerce players Amazon and Flipkart who have been luring customers by attractive discounts and cashbacks. Payment companies and banks forging partnerships with marketplaces to offer attractive discounts to the consumers are likely to be hit with the new rules.

The rules were made effective from 1 February 2019.

The new rules have also barred those entities from selling on the ecommerce marketplaces who have equity infusion from the platforms. The clause has been inserted to do away with the preferential treatment given by the marketplaces to companies in which the platforms have stakes. The policy also prohibits platforms from giving any special treatment to preferred suppliers.

The new policy also tightens inventory-based provisions restricting vendors from becoming exclusive suppliers to a marketplace. The rules now limit the purchase of products by marketplaces from a single vendor to 25% of overall procurement by the marketplace.

It is being argued that the restrictions for a vendor not to sell more than 25% of products on an e-commerce platform will likely prevent many home-based or small entrepreneurs without brick-and-mortar operations, from thriving.

Repercussions

The recent developments have not come without some damage. The US Government has taken away benefits under the Generalised System of Preferences Program, which entitled a duty-free export of certain goods from India to the US.

It is believed that there could be similar actions in future as the regimes across the world are turning to protectionist measures to address local concerns.

Who benefits

The proposed policy aims to empower domestic industry and enable small entrepreneurs says Government officials. They claim the policy will provide a level playing field to startups and encourage their participation in the digital economy.

The requirement of storing sensitive data locally will prevent misuse of vital information of the customers and would also set accountability of companies who violate the rights of individuals. Under the existing laws, India cannot exercise its jurisdiction on the companies who are not based in India and have stored data outside. The Indian Government says there is a need for a strong policy framework to protect the rights of Indian citizens.

It also argues that traditional brick-and-mortar sellers will gain from the recent tweaking of the FDI rules. The Government heard the long-standing demand of sellers to regulate FDI which was allegedly being used to subsidize products sold on marketplaces by way of discounts and cashbacks.

Even many relatively smaller ecommerce companies like Snapdeal are also expected to gain from such a change.

The Government says its flagship program ‘Make in India’ will be enhanced by developing an ecosystem for new markets through its proposed ecommerce policy.

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