Regulating E-Commerce Companies: How Much Is Too Much?

In the last few weeks, a new front has opened up for e-commerce companies operating in India. The government has been warning large e-commerce firms, a market led by US giants Amazon and Walmart through Flipkart, on predatory pricing and not be in violation of multi-brand retail foreign direct investment (FDI) rules.

This issue has led to a media debate on why should government be intervening a new age technology-led business area. The government has sent questionnaires to various e-commerce companies on their compliance with extant regulations.

To be sure, e-commerce is a very small part of the overall retail market in India, at just about 5 per cent in value terms.

In fact, even in a developed economy like the United States (US), the e-commerce share in the total retail market tends to be around 15 per cent. The critics of the government point out that the e-commerce business is too small and irrelevant for government to train its regulatory guns on.

However, e-commerce businesses almost always disrupt the big brick and mortar retailers or those ‘in the middle’.

Bulk of all retail trade in India is unorganised — be it grocery, small kirana, and food and beverages segments — and this bottom of the pyramid business gets impacted slowly. The larger organised businesses have greater share of voice as well as lobbying influence in the economy.

So the question — how much regulation is over-regulation — is always a tough one for the government to deal with in such emerging businesses.

On one hand, the international giants will look at as much free hand as possible as they expand their footprint in a new frontier like India.

On the other hand, the local trade associations are always asking for more control on the e-commerce firms, who are flush with capital.

Regulation in itself is nothing new. Anti-trust laws exist in all countries and in fact are always taken much more seriously than what Indian regulators have done over the years. These routine investigations cover both online and offline players, which are large enough to game the sector they operate in.

Take the case of Amazon. Last September, the Federal Trade Commission (FTC) of the US started an investigation into whether Amazon was genuinely helping small merchants. The FTC started off with interviewing small merchants to determine if they really had an alternative to sell on other platforms outside of Amazon and what percentage of their revenue came via Amazon.

The question in the US is whether Amazon is a retailer or whether it is an online shopping player. Amazon has a paltry 4 per cent market share of the overall retail market, but almost 40 per cent market share in online shopping.

If the latter view prevails, Amazon does get a huge leverage over its sellers. Amazon does control the seller onboarding and their operational freedom on the platform quite closely. It retains wide ranging rights to suspend sellers, though it has instituted an appeals process.

It is not just in the US that Amazon is facing questions. Earlier this year, there were probes on Amazon’s business model in various European countries.

After Amazon put up new rules to manage sellers, Germany and Austria ended their investigations against the firm.

However, other countries continue to seek more information from Amazon on its treatment of small businesses.

Regulators have also been concerned about how Amazon uses data from its platform — of which it has a humongous amount — to advertise and prioritise sellers. It does control which listings show up on priority and what offers are being shown to the consumers.

Over time, this model can lead to potential discrimination against smaller businesses and higher business volumes for own labels.

This issue is however not just about Amazon. Even Walmart, the original retail giant, has been questioned by the authorities from time to time.

The most famous example in this case was in 2005, when regulators fined Walmart and Netflix on how they were colluding to run the DVD market in the US. Other countries like Mexico have also acted against Walmart on trade practices.

At the start of this year, India acted against e-commerce firms asking them to remove inventory from affiliated brands — a move which was widely criticised then.

Indian multi brand FDI regulations do not allow e-commerce platforms to own or manage inventory. Related brands were potentially not in accordance with these regulations.

The biggest challenge for the Indian regulators has been the allegations of predatory pricing by e-commerce firms. The firms insist that any discounts applicable on their platform were passed on directly by their sellers. The regulators, however, feel that if the platforms manage inventory or if they use their marketing spend towards discounting, it sits in contravention of Indian laws.

Trade associations as well as large foreign retailers who evaluate the options to set up shop in India have routinely complained that e-commerce firms are funding their negative cash flows through large investment pockets.

E-commerce firms on their part have maintained that they have created new market for more than 5 lakh sellers in the country.

As e-commerce impact grows and covers newer segments — notably perishable, quick moving items like grocery and food — the regulation debate will continue. Indian authorities are well within their rights to ensure no restrictive trade practices are being promoted in this space.

That these platforms create new markets and provide employment is not a substitute for complying with existing multi-brand retail rules.

The onus also lies on Indian businesses, which need to demonstrate greater agility to work with new platform options to stay relevant.