E-Commerce Rules 2020: Protecting Consumer Welfare or Harming Individual Enterprise?

[Dhanush Dinesh is a graduate of the National Law School of India University, Bangalore]

The Consumer Protection Act, 2019 has come into force on July 20, 2020. This statute supersedes the older Consumer Protection Act, 1986 and has been updated to reflect and incorporate modern forms of commerce, such as online shopping and tele-commerce. In furtherance of this, specific rules have been notified by the Central Government to regulate e-commerce platforms in the form of the Consumer Protection (E-Commerce) Rules, 2020. These rules regulate ‘e-commerce entities’, and are intended to facilitate consumer welfare through easier return mechanisms, resolution of customer complaints, and preventing discrimination against merchants on online shopping platforms. One such rule which has drawn attention is the mandatory ‘country of origin’ tag that e-commerce entities must now carry for all products listed on their platform. While these objectives are indeed desirable, it is worth examining whether the rules, in their current avatar, have any unintended consequences. Through this post, the author intends to draw out some key consequences of the rules on two types of commercial entities –small local businesses and digital app platforms and their developers.

Rule 2 of these rules indicates that the rules shall apply to “all goods and services bought or sold over digital or electronic network including digital products.” Further, it indicates that both models of e-commerce, i.e., marketplace and inventory models, are covered within its ambit, as well as e-commerce networks of single-brand and multi-brand retailers. The rule also states that any unfair trade practice across all models of e-commerce are covered by these rules. Finally, it states that the rules apply to an e-commerce entity providing goods and services to consumers in India, even if the entity is not established in India.

The full import of this rule may not be apparent at first glance. While it is obvious that the government wishes to regulate platforms such as Amazon and Flipkart, which are the popular e-commerce entities in public imagination, it also intends to regulate individual retail entities which operate an e-commerce presence. From the text of rule 2(iii), it becomes apparent that entities such as Decathlon, H&M, Reliance, and other retail companies which focus on offline operations but maintain an online presence would also be covered by these rules. Even so, this appears to be an acceptable extension of the scope of the rules, as these entities are currently regulated by the Foreign Direct Investment Regulations as well (so long as they have foreign investment).

Where the E-Commerce Rules go further is in the regulation of digital marketplaces selling ‘digital products’. While ‘digital products’ is not defined in the rules, a plain reading indicates that it would include applications, software, or digital subscription products. The use of ‘digital products’ and not ‘digital products and services’ may be intentional in order to exclude digital service providers such as Netflix. This scope would, however, extend to app marketplaces such as the Google Play Store and the Apple App Store and regulate their functioning. The interpretation that these entities fall within the scope of the rules is bolstered by the specific sub-rule indicating the application of the rules to non-Indian entities offering goods and services to consumers in India. These entities were not previously regulated by the Consumer Protection Act, 1986, indicating an increase in the regulatory scope of the principal Act. With this increase in scope, one may begin to look at the Consumer Protection Act, 2019 and the E-Commerce Rules as the first step in regulating global technology platforms operating in India.

Rule 4 lays out the various duties of ‘e-commerce entities’. An e-commerce entity is defined under rule 3 as “any person who owns, operates or manages digital or electronic facility or platform for electronic commerce, but does not include a seller offering his goods or services for sale on a marketplace e-commerce entity;”. Under rule 4(1), all e-commerce entities shall be a corporate entity (domestic or foreign), and have a nodal person of contact.

This provision impacts individual enterprises, particularly during the current pandemic crisis, due to the fact that an individual retailer who is operating a sole proprietorship or any non-corporate form of commerce is effectively restricted from operating an e-commerce platform for their goods and services. Due to the widespread closure of public spaces and shops during the pandemic, various proprietors (such as bookshops and bakeries) have opened online store-fronts through technology solutions such as Shopify and Instamojo. These technology companies merely provide the tech infrastructure (primarily design and payment gateway/processing) for these individual shops to set up online stores, with order fulfilment and management entirely being the responsibility of the shop. In such cases, it becomes relevant to determine whether the individual business amounts to an ‘e-commerce entity’ or if they are merely a ‘seller offering his goods or services for sale on a marketplace e-commerce entity’. Further, if the latter view is taken, would the technologies that enable such e-commerce be considered e-commerce entities and have to undertake the relevant duties and liabilities? These are issues that are unresolved and have the potential to stifle business due to the ensuing confusion.

Apart from these online shop-fronts operated on individual proprietors’ websites, social media websites such as Facebook and Instagram have also begun to offer e-commerce solutions for individual businesses on these platforms. Here again, while the online ordering experience is controlled by the website, order fulfilment remains the responsibility of the individual business. The effect of the rules on these e-commerce solutions also remains unclear. A plain reading of the rules indicates that these individual proprietors would be required to incorporate their businesses as companies under the Companies Act, 2013 and undertake the various reporting and compliance obligations thereunder in order to operate their online shop-fronts.

The rules essentially treat these businesses as inventory-based marketplaces and place the duties and liabilities indicated in rule 7 on them. Thus, it is important that businesses that are operating as sole proprietorships or non-corporate forms note these obligations and include the same on their e-commerce portals.

It remains to be seen how these rules will apply to social media websites, given that they are merely providing an additional technology layer at an individual business’ discretion, and not promoting or assuming responsibility for any goods sold through the platform. It will be additionally crucial to determine how businesses operating through these platforms can display the information obligated of them under rule 7.

The rules further mandate the setting up of a grievance redressal mechanism with a dedicated officer, both for e-commerce entities as well as sellers on a marketplace platform. This has multiple layers of consequences. Due to this, individual proprietors selling goods and services online are required to institute a grievance redressal mechanism with a dedicated officer, leading to additional strain on their finances (particularly in current cases where a business is just a single person selling out of their home, through an online platform). Apart from the effects on small businesses, these rules also impact large digital service marketplaces. Sellers on these marketplaces (in this case, application developers) are now mandated to set up grievance redressal mechanisms, which again raises business costs, particularly for independent developers.

While it remains to be seen how administrative authorities will interpret these rules, a plain reading seems to indicate that these rules will cover a much broader scope than current regulations. We may see individual proprietors refrain from operating an online portal altogether, as the costs of incorporation and appointment of a dedicated grievance redressal officer (which do not apply in the offline form of commerce) prove prohibitive. With respect to application store platforms, it is likely that individual developers without the requisite financial wherewithal will simply delist their applications from the Indian versions of these platforms.

The combined effect of fewer online store-fronts of small domestic businesses and restricted access to global digital service platforms will adversely impact economic growth, at a time when global economies are already contracting due to COVID-19 related issues. It is hoped that administrative authorities issue a clarification in this regard to enable e-commerce and unlock the digital potential of a multitude of small businesses in the country.

Dhanush Dinesh

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