Flipkart's Big Billion Day paves way for e-comm regulation

The apology issued by Flipkart founders Sachin Bansal and Binny Bansal to their customers was perhaps one of the most widely read documents on social media last week. However, statements released by manufacturers, brick-and-mortar retailers, and retailer bodies such as the Confederation of All-India Traders suggest that Flipkart's customers are not the only aggrieved parties. Brick-and-mortar retailers are concerned with what they refer to as "unrealistic" and "market distorting" discounts, and manufacturers (specifically manufacturers of electronics and white goods) want to retain "hygiene" in terms of pricing, as brick-and-mortar stores still account for almost 90% of their sales.

While all concerned stakeholders are entitled to express their grievances, the question is whether Flipkart's Big Billion Day operated within the confines of applicable law?

E-commerce in India is on an almost unparalleled growth trajectory, and the regulatory framework is playing catch up. Apart from certain security, vigilance and privacy regulations under the Information Technology Act, 2000, there is little in form of governance of e-commerce, especially online retailing. Existing legislation is yet to be amended to cover the dynamic landscape of e-commerce. The lack of governance is evident in the recent statements of commerce and industry minister Nirmala Sitharaman, who – on the back of representations received from the Confederation of All India Traders– told reporters that "we have received many inputs. Lot of concerns have been expressed. We will look into it".

There have also been accusations of predatory pricing due to the fact that goods were sold below what manufacturers and brick-and-mortar retailers consider the cost price. The concept of predatory pricing is essentially an issue under anti-competition/ anti-trust laws, and one that is recognised under the (Indian) Competition Act, 2002 and the regulations framed thereunder. Section 4 of the Competition Act, 2002 discusses 'abuse of dominant position' by an enterprise, which refers to the behaviour of an enterprise that enjoys a dominant position – defined as a position of strength, enjoyed by an enterprise in the relevant market, i.e. India which facilitates such enterprise to: (a) operate independently irrespective of the competitive practices that are prevailing in the relevant market or; (b) affects its competitors or consumers or the relevant market in its favour. Conduct which adversely affects competitors (inability to compete in the market), consumers (acceptance of the price and goods (irrespective of the quality) being offered by the enterprise abusing its dominant position or the structure of the market can also tantamount to abuse of dominant position. Further, predatory pricing has been defined under the Competition Act, 2002, as the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors. In a nutshell, if the dynamics of a market are lost due to practices such predatory pricing, it can be inferred that the market has evolved to support the enterprise abusing its dominant position.

That said, ascertaining whether a firm has undertaken predatory pricing has been notoriously difficult to prove across jurisdictions – due to the subjective nature of the test and the inherent difficulty in distinguishing between aggressive pricing (a key feature of the free market) and predatory pricing. Also, it may prove difficult to establish that Flipkart is in a dominant position given that: (a) it operates in a fiercely competitive marketplace alongside Snapdeal and Amazon; and (b) online retail reported accounts for only 10% of the entire retail sector.

Certain manufacturers have also claimed that they were unaware of the sale and the extent to which their products will be discounted. It is common knowledge that in 2013 Flipkart migrated to a marketplace model, whereby vendors list and sell their products on the website, and Flipkart itself does not hold any inventory. Therefore, while Flipkart may have coordinated with vendors to list their products at a discounted price, and may have even agreed to reduce its margin on concluded sales (as has been alleged), it was for vendors to decide whether or not to carry out the discounts. Consequently, any grievance that a manufacturer has regarding being blind-sided on the discount at which their products were sold would be subject to the contractual relationship between the vendor and the manufacturer, and not Flipkart and the manufacturer.

The fallout from Flipkart's Big Billion Day is clearly evident from the coverage it has received, but it may also prove to be a seminal day from a regulatory standpoint. The Big Billion Day has brought to light the glaring inadequacies in the regulatory framework when it comes to e-commerce. However, statements of the commerce and industry minister coupled with a potential complaint to the Competition Commission of India indicate that regulatory reforms and clarity may be around the corner.

Shivpriya Nanda is a partner at J Sagar Associates. Views are personal. Wth inputs from Zain Pandit and Namita Bahri