Bad days for shoppers: Deep discounts on Amazon, Flipkart may end

The government will likely junk a recent proposal of a task force to set up a regulator for the e-commerce sector, a senior official told FE. However, in sync with the task force’s view, it could explore ways to curb alleged “market-distorting, predatory and differential pricing” of products through hefty discounts by e-tailers like Amazon and Flipkart in violation of foreign direct investment (FDI) rules, he said.

While the policy has clearly barred such discounts by e-tailers, the perception has been that the designated agencies –RBI and Enforcement Directorate – have been lax in enforcing it.

The department of industrial policy and promotion (DIPP), which has now taken the lead in stitching together the e-commerce policy involving various departments, is expected to soon place a policy proposal before commerce and industry minister Suresh Prabhu for review.

The task force on e-commerce, headed by former commerce secretary Rita Teaotia, had in late July suggested that a watchdog be set up to regulate the e-commerce sector, including the alleged abuse of FDI rules. It recommended that a separate wing in the Enforcement Directorate be set up to handle grievances related to implementation of FDI rules.

On their part, Amazon, Flipkart and others claim they always comply with the rules and that the discounts are offered by the sellers on their platform, and not themselves.

The task force had sought to make the restriction on discounts even more explicit. It had suggested that curbs be imposed on not just e-commerce marketplaces but also their group companies, to not directly or indirectly influence the sale price of goods and services. As per its suggestion, bulk purchase of branded goods such as electronic products (especially mobile phones), white goods, branded fashion products by related party sellers which lead to price distortions in a market place would be prohibited. A sunset clause, which defines the maximum duration of differential pricing strategies (such as deep discounts) that are implemented by e-commerce platforms to attract consumers, would be introduced.

The government has already dropped certain controversial proposals, including the one to allow up to 49% FDI in e-tailers, provided they sell only domestically-produced items.

Another proposal to enable domestic founders to retain control of their e-commerce companies even if they hold a tiny stake has been relegated to the background, on fears of a backlash from foreign investors.

Recently, while clearing the $16-billion Walmart-Flipkart deal, the Competition Commission of India brought the issue of discounts to the fore. It said: “Upon examination of the relevant facts, it was found that a small number of sellers in Flipkart’s online marketplaces contributed to substantial sales. Almost all of these were customers of Flipkart in B2B segment, and hence were common customers, availing significant discounts from Flipkart in both B2B segment as well as in the online marketplaces.” It added that the revenue earned from these common customers in the online marketplaces was also relatively less vis-à-vis the non-common sellers whose sales on the platform was considerably low.

Currently, while the DIPP formulates and notifies FDI policies, any violation of such rules is dealt under the penal provisions of the Foreign Exchange Management Act. This Act is administered by the Reserve Bank of India, and the ED is its enforcement authority.

At present, the government allows up to 100% FDI in only e-commerce marketplaces via automatic route, but no FDI is allowed in the inventory-based model (barring food retail).