Deep discounting cap may hit e-commerce funding

E-commerce companies like Amazon and Flipkart may soon be barred from offering deep discounts. The government is considering tightening the rules for e-commerce firms and plans to set up a regulator to protect consumers of the online firms. Experts say it may affect funding of e-commerce companies which often need to raise growth capital.

These recommendations for the e-commerce sector are part of the draft National E-Commerce Policy prepared by the commerce ministry. The think-tank headed by commerce minister Suresh Prabhu has proposed that bulk purchases by the firms, which lead to e-commerce firms offering deep discounts, should be prohibited and these discounts should be stopped from a specified date.

The draft policy also provides for setting up of a regulator Central Consumer Protection Authority (CCPA) to protect consumers of the online firms. The draft policy is likely to be soon put up for public consultation.

"Bulk purchase of branded goods such as electronics, mobile phones, white goods, fashion stuff ...which leads to price distortions in a marketplace would be prohibited," as per the draft of the policy document.

There should be "a sunset clause which defines the maximum duration for which deep discounts can be offered by e-commerce platforms to attract consumers."

The restriction imposed on e-commerce marketplace would be extended to group companies of the e-commerce players.

"We will have to see if the government is trying to control vendors as the discounts are offered by vendors and not by platforms," says Amarjit Singh, partner, tax regulatory and internet business, KPMG. "Many of the recommendations are restrictive in nature," he said.

The government is likely to allow 49% FDI in the online companies selling only Indian goods. The draft policy proposes the "sale of domestically produced goods through online platforms would be promoted by allowing limited inventory-based B2C model, wherein 100% made in India products would be sold through platforms whose promoter would be Indian, the platform company would be controlled by Indian management and foreign equity would not exceed 49%." For example, HUL products can be sold by anybody provided it is owned and controlled by an Indian.

Among other things, the draft has also flagged the need to amend relevant provisions in the Companies Act to facilitate founders to have control over their e-commerce firms, despite having a small shareholding. "It would be examined in the light of the experience of their utilisation by e-commerce companies," as per the draft report.

Experts said it will create a problem to get good capital as the e-commerce firms go for multiple rounds of funding.

To enable the firms to raise funds domestically, investment by large companies in start-ups should be incentivised. The rule regarding 36-month post-listing restriction on promoters should be amended to have a shorter duration as it is there in some major jurisdiction.

The committee has recommended setting up of a regulator CCPA to protect the consumers in the area of e-commerce. The consumers will be able to register unresolved complaints here.

All e-commerce operators, both domestic as well as foreign players, will have to register with the regulator in order to operate in the country. E-commerce firms can also approach it for complaints regarding fraudulent activities. The regulator will also act as a nodal agency for coordination within the government.

The National Consumer Helpline would be designated as the interim agency till CCPA starts functioning.

The committee has suggested setting up a separate wing in the Enforcement Directorate (ED) to handle consumer grievances.

E-commerce entities will have to make a full disclosure to the consumer regarding the purpose and use of data collection in a simplified and easily understandable form on their website.

Certain categories of data would be required to be stored exclusively in India. This included data generated by users in India from various sources such as e-commerce platforms, social media, search engines and community data collected by Internet of Things (IoT) devices. The cross-border flow of data not collected in India will not face any restrictions.

There could be a two-year sunset period for industry to adjust before localisation becomes mandatory. Steps such as giving infra status to data centres, tax benefits would be taken to incentivise domestic data storage in India. The government would have access to data stored in India for national security and public policy objectives subject to rules related to privacy, consenting. Data sharing will be allowed with start-ups having a turnover of Rs 50 crore.

The draft document has also given many suggestions to address anti-competitive practices in the country so that small market players and ultimately consumers are not adversely impacted by unfair practices of a few large operators.

The Competition Commission of India would consider amending thresholds so that potentially competition distorting mergers and acquisitions are examined by them in case of e-commerce entities. The draft finally proposes a single legislation to address all aspects of e-commerce including consumer protection, FDI among others.