Draft e-commerce rules require massive course correction

"If implemented, the draft e-commerce rules can have an obstructive impact on the economic development of the country with respect to job opportunities, scope for the growth of MSMEs, global investments, and consumer experience."
Draft e-commerce rules require massive course correction

The government of India announced the draft e-commerce rules on 28th June 2021 which aims to ban promotions and advertisements by sellers and flash sales, make it mandatory for e-commerce entities to register with the Department for Promotion of Industry and Internal Trade (DPIIT), and propose the appointment of a grievance officer, a chief compliance officer, and a nodal contact person for 24×7 coordination with law enforcement agencies.

In its current form, the rules have created confusion among businesses, scholars and experts, especially around key definitions such as who an ‘e-commerce entity’ or a ‘related party’ is. Experts have also raised concerns around how these rules will adversely affect consumers, companies as well as investors. Sharing his legal opinion on this, Gopal Jain, Senior Advocate, Supreme Court of India, said, “The proposed amendments go beyond the ambit and scope of the Consumer Protection Act and indirectly regulate e-commerce entities by imposing additional obligations. If implemented, this can have an obstructive impact on the economic development of the country with respect to job opportunities, scope for the growth of MSMEs, global investments, and consumer experience.”

From the perspective of sellers and e-commerce companies, the rules impose additional constraints and compliance burdens which will disrupt their ordinary course of business while also creating entry barriers for small business and ancillary service providers. “The law should not be used by the government in a manner that is destructive to the investment plans and innovation capabilities of online platforms, which is also a means of livelihood for small and medium businesses. The Centre should focus on a set of policies and regulations that simplify the processes and enable ease of doing business for e-commerce marketplaces in India rather than undulate investments and potential job opportunities for the country,” stated Jain. The draft rules not only complicate the e-commerce infrastructure but are also confusing and need clarity. The definition of e-commerce entities is unclear and overarching, stakeholders are confused about who the rules will apply to. Similarly, the draft rules are also unclear about how flash sales will be regulated. Bringing this into effect will stifle innovation in the e-commerce sector without imposing similar restrictions for traditional brick and mortar competitors.

Further, highlighting the legal flaws and infirmities associated with it, Jain stressed that the draft rules are in conflict with and encroach upon existing legal frameworks such as the Competition Act, 2002 with regard to antitrust concerns including abuse of dominance, preferential treatment and deep discounting. The draft rules have also incorporated provisions such as mandatory disclosure of Country of Origin which is already regulated by the Legal Metrology Act and Rules.

There is a disjunction between the rules and the Consumer Protection Act, 2019 (CPA). The legislative intent of CPA is to protect consumers while ensuring maximum benefit is afforded to them. However, these rules do not serve consumer interests and require urgent course correction to bring it within the appropriate legal framework. These rules need more deliberation as it seems like they have been put together in haste. The Consumer Affairs Ministry initially ordered that “only specific flash sales or back to back sales which limit customer choice, increase prices, and prevent a level playing field are not allowed” while it later elaborated that it will not regulate flash sales. There is still an ambiguity with respect to how sales actually limit consumer welfare.

The Supreme Court has laid emphasis on providing utmost certainty and stability in order to gratify the growing sector by enabling the rule of law vital for investor confidence. Jain highlighted that in the Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd. (2019) 10 SCALE 21, the Court held that “There is a significant value which must attach to observing the requirement of consistency and certainty. Individual affairs are conducted and business decisions are made in the expectation of consistency, uniformity and certainty. To detract from those principles is neither expedient nor desirable”.

The stark contrast between the online and offline space will restrict India’s position as a hub for global investments as these restrictive rules do not apply to the brick and mortar stores, which engage in discounts, end of season sales, and special tie-ups with manufacturers. Imposing such repressive regulations on e-commerce platforms highlight that the rules were designed to give greater advantage to traditional retailers, rather than consumers, or small and medium sellers on these platforms.

The key concern areas suggested by Jain are:

  • The Draft Rules – a ‘Misfit’ under the Consumer Protection Act

The Draft Rules have no relation with the consumer buying and selling goods and the Consumer Protection Act. It’s an indirect attempt to regulate the online space by clubbing multiple issues relating to the act which aims to assess and investigate adverse impact on consumers.

  • Overlapping Jurisdictions – Head on Collision

The proposed amendments directly seek to regulate the issue of preferential listing and promotion of private labels which falls within the domain of the CCI. The issued rules create ambiguity as they encroach upon existing mechanisms through additional compliance orders.

  • Policy Confusion - Consequences of policy instability on ecommerce, sellers, and the marketplace

The overlapping of jurisdictions of the issued amendments with that of CCI and the Consumer Protection Act magnifies regulatory uncertainty, creates confusion, and hampers the investment climate of the country.

  • Wide and expansive nature of related party and associated Enterprises

The Draft Rules are wide, expansive and all-encompassing.

  • Introduction of “Fall-back Liability”

The rules impose fall-back liability strikes at the root of the e-commerce marketplace making them liable for fraud committed by a seller when the platforms are merely responsible for transmitting information provided by the seller.

  • The Draft Rules are contrary to principles of proportionality which requires a balanced and graded approach

The Supreme Court in numerous judgments has applied the doctrine of proportionality to check any drastic, harsh, and disproportionate action. For instance, Justice K.S. Puttaswamy vs. Union of India & Others (2017) 1 SCC 1 it was held  that - “proportionality is an essential facet of the guarantee against arbitrary State action because it ensures that nature and quality of the encroachment in the right is not disproportionate to the purpose of law.

  • E-commerce rules are potentially unconstitutional and violate article 14 and 19

A preliminary reading suggests that the draft rules are in contravention to equality provisions laid down in Article 14 as it discriminates between online and offline sellers, especially with regard to flash sales and inventory ownership. Further, the draft rules also impose an unreasonable restraint in trade which is a violation of Article 19 (1)(g).

In conclusion, the draft rules encompass a full-fledged regulatory regime for online platforms in the name of safeguarding consumers’ interests. There is an urgent need to address the loopholes to avoid legal whirlwinds with regard to the issued amendments.


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