CCI probe against Amazon, Flipkart: An unfair practice?

Many analysts agree that government policies have been increasingly favouring domestic retailers, read Reliance (MIG photos)

After having dominated the rapidly growing ecommerce market in India for over five years, with a combined market share of over 90 pc in the USD 64 billion market in 2020, ecommerce giants Amazon and Walmart-owned Flipkart are facing multiple challenges that could see their market dominance shrink rapidly. The challenges for the online business giants come from several quarters.

The Centre has invited comments on draft new rules amending Consumer Protection (E-commerce) Rules, 2020, governing e-commerce companies in the country and which is likely to seriously impact the market leaders. The new rules propose to limit flash sales that allegedly limit customer choice, increase prices and prevents a level playing field.

The proposed rules also make it mandatory for e-commerce companies to put in place redressal mechanisms and appoint a chief compliance officer. Reflecting the equally controversial IT Rules 2021, under these rules e-commerce firms will also have to name a resident grievance officer who has to be a company employee and a citizen of India and serve as the nodal point of contact for law enforcement agencies.

To tackle growing concerns of preferential treatment, the new e-commerce rules propose to ensure none of the related parties to a marketplace are listed as sellers or are allowed to use any consumer information (from the online platform) for ‘unfair advantage’. Further, even logistics service providers to these marketplaces will not be allowed to give preferential treatment to any sellers.

Another significant change being brought in place is that it limits use of ‘private labels’ or products sold under the marketplace brand. The online marketplaces will also have to identify goods based on their country of origin and provide a filter mechanism at a pre-purchase stage for customers. Online marketplaces will also have to offer alternatives to these imported goods to provide a “fair opportunity” to domestic sellers, according to the ministry.

CCI to probe unfair market practices

It is not just over the proposed modifications to the E-Commerce Rules, 2020, that e-commerce giants would be losing sleep, one of the biggest challenges comes from the anti-trust regulator, Competition Commission of India (CCI) that has begun probing both for alleged anti-competitive market practices. The duo suffered a setback last week when the Karnataka High Court rejected their petition challenging the probe.

The court also upheld the decision to whether both companies entered into anti-competitive agreements in violation of the Competition Act 2002. The decision to probe Flipkart and Amazon follows a complaint by a traders’ body in Delhi that alleged that both the firms violated the law by giving preferential treatment to select proxy sellers and offered deep discounts by indulging in anti-competitive agreements.

One of the biggest allegations against Amazon is that it gives preferential treatment given to certain large sellers, including its own subsidiaries like Cloudtail and Appario. These two firms reportedly account for 35 pc of the total sales of Amazon and only 35 sellers accounted for about 67 pc of the total sales.

Interestingly, in an earlier market study conducted by CCI in January 2020, the regulator upheld ‘self-regulation’ as a way forward for the industry, but the regulator seems to have changed its direction with the new probe.

Traders ranged against Flipkart, Amazon

The brick-and-mortar traders have for long been ranged against not just Flipkart and Amazon, but the entire e-commerce business, claiming that it threatened millions of jobs by predatory pricing adopted by various e-commerce businesses.

For almost about a decade, the traders have been protesting against e-commerce companies alleging unfair practices and abuse of market dominance by them. In 2019, in one such protest, the Confederation of All India Traders’ (CAIT) demanded a complete ban on ecommerce in the country. It accused them of violating foreign direct investment (FDI) norms, causing goods and service tax (GST) and income tax revenue losses to the government, and indulging in unethical practices such as deep discounting and predatory pricing. It also asked for creation of an independent body to investigate the alleged wrongdoings by the ecommerce companies.

The traders fault the e-commerce giants on four counts. One is the frequent exclusive launches of mobile phones, by far the hottest selling high-value item in online marketplaces. The traders say that the exclusivity that Amazon and Flipkart obtain for themselves goes on to hurt small sellers’ ability to procure them and causes serious losses.

The traders also say that the online firms’ use of proxy sellers such as Cloudtail and WS Retail enables them to gain unfair control over the marketplace and favours select sellers, which anyway are linked to the e-commerce firms, in clear violation of the law. Another violation of the law is the preferential listing and promotion of private labels that are owned by Flipkart and Amazon. The biggest charge that CAIT levels concerns predatory pricing, alleging that deep discounting which makes it difficult for small and medium sellers to compete with the big guns of the market.

Incidentally, on two previous occasions, in 2015 and 2018, the CCI had dismissed similar allegations against the two market platforms on the grounds of adequate competition in the market. However, now the CCI says that both Amazon and Flipkart follow the same practices, therefore, competition between the platforms prima facie does not play a role in mitigating the potential adverse effect on competition.

Opportunity for Jio

The moves against Amazon and Flipkart come at an opportune time for an emerging player in the online market. For the past couple of years, Mukesh Ambani’s Reliance Industry has been investing heavily in setting up the infrastructure needed for taking a sizeable chunk of the e-commerce market in India.

Analysts say that while the government’s tweaked rules hurt the established leaders like Flipkart and Amazon, they will be a huge favour to Reliance Retail that wants to dominate the e-commerce segment. It has committed over USD 25 billion to the e-commerce business and already spent a significant amount in building the empire that would resemble Chinese giant Alibaba.

Incidentally, Ambani is using his telecom venture Jio to pilot the e-commerce venture. Five years ago, when Jio was launched, it received a huge favour from the telecom regulator as well as the Competition Commission of India which ignored the brazen use of predatory pricing by Jio for over 6 months, during which hundreds of millions of consumers received free voice calls, bundled with cut throat data prices, enabling Jio to dethrone long-established leaders like Airtel and Vodafone.

Despite numerous complaints by the incumbents against Jio’s unfair market practices, neither the CCI nor the TRAI made any attempts to rein the company in. Four years later, Ambani is deploying a very similar tactic — cutthroat pricing — to gain an edge in the country’s increasingly competitive e-commerce space. This, at a time, when the rules have again been tailor-made to help Jio gain an upper hand against its rivals.

Hence, last year during the Diwali sales, Reliance portals offered steep discounts, often as much as 50 pc on the most popular food items during the festive season. Reliance also was selling latest Samsung smartphones at prices cheaper than rivals, with as much as 40 pc rebates. With the new rules, while Amazon and Flipkart will be barred from deep discounting, due to their market dominance, nothing stops Reliance from undercutting its formidable rivals and benefit from lopsided regulatory authorities, to repeat the telecom scenario in e-commerce in a matter of couple of years.

Many analysts agree that government policies have been increasingly favouring domestic retailers, read Reliance. Since the end of 2018, India’s foreign investment rules have also barred Amazon and Walmart’s local unit Flipkart from featuring exclusive products and owning inventory, in a bid to restrict their ability to directly influence prices and offer discounts. International companies aren’t allowed to own more than 51 pc of local brick and mortar supermarket chains. Even that limit is subject to conditions such as setting up only in cities with populations of less than 1 million. No such limits have been placed on Ambani’s Reliance.

It would be too soon to write off Walmart or Amazon in India as both have invested heavily in the market and are eyeing the USD 200 billion value that the Indian retail market grow to within five years. But they would have to counter not just a very powerful domestic rival, but also the government that seems comfortable in bending over backwards to favour its preferred home-grown oligarchs.