E-commerce Rules amendments: Protects consumers but lacks clarity


tl;dr

The recently proposed changes to the e-commerce rules, seek to usher in a stricter framework to ensure consumer protection against unfair trade practices of e-commerce companies. However, in a bid to create a more robust compliance mechanism, the rules run the risk of creating greater fault lines in India’s e-commerce industry through increased compliance burdens and broad gauge definitions. Read our submission to the Department of Consumer Affairs on on the proposed amendments to Consumer Protection (E-Commerce) Rules, 2020.

Background

For the last couple of years, e-commerce and online shopping have increasingly become a key part of the consumer experience. These trends were provided a further flip by the COVID-19 pandemic induced lockdown, as an increasing number of people were forced to shop online. This resulted in a 46% growth in sales volume year-on-year for Q4 of 2020, which translated to a 43% growth in value! What’s more, this growth was not just limited to urban metropolises: 90% of the incremental growth came from tier 2 and tier 3 cities.

However, as might be expected, this growth has brought with it an increase in both e-commerce fraud and consumer manipulation. The number of cases of e-commerce fraud has jumped nearly six times from 977 cases in FY17 to 5,620 cases in FY20 till November 2019. Meanwhile, the number of e-commerce complaints raised through the national consumer helpline during FY2020 stood at 1,54,122, compared to 1,03,364 during FY2019, a rise of almost 50%. Between April 2020, and February 2021, this figure increased further to 1,88,262 complaints. Clearly, there is a dire need to protect the interests of consumers online, especially in the digital age where the larger e-commerce entities can deploy various methods to dupe consumers without technically resorting to fraud.

On June 21, 2021, the Ministry of Consumer Affairs put out proposed amendments to the Consumer Protection (E-Commerce) Rules, 2020. The government stated that “Prevalence of such unfortunate incidents has negatively impacted the consumer and business sentiment in the market, causing immense distress and anguish to many. It was observed that there was an evident lack of regulatory oversight in e-commerce which required some urgent action. Moreover, the rapid growth of  e-commerce platforms has also brought into the purview the unfair trade practices of the marketplace e-commerce entities engaging in manipulating search result to promote certain sellers, preferential treatment to some sellers, indirectly operating the sellers on their platform, impinging the free choice of consumers, selling goods close to expiration etc.”

Thus, to address such issues, they had proposed the aforementioned amendments. While we support some of the changes proposed, we believe certain problems emerge from the new framework, while certain provisions need further clarification.

Issues with the amendments

While we appreciate the intent of these Rules to bolster platform neutrality and empower consumers against malpractices and price manipulation, we are concerned that it fails to provide definitive structure to the proposed changes and evokes fears regarding implementation.  In our submission on the proposed amendments, we highlighted our caveats to the changes under seven broad categories:

  1. Need for clarity in the definition of ‘flash sale’: The ubiquity and rising popularity of flash sales is one of the most characteristic features of the e-commerce industry. However, allegations of marked up and predatory pricing in the guise of these sales have brought several e-commerce giants like Amazon and Flipkart under scrutiny. Regulation of flash sales is indeed a much needed provision. However, it breeds major confusion since Rule 3(b) fails to adequately distinguish between flash sales by e-commerce entities and “conventional” flash sales by third party sellers.
  2. Blanket prohibition on predictive pricing might do more harm than good: Rise in e-commerce market has also generated increased incidents of fraud. Such malpractices sometimes assume a more sinister form by deploying dark patterns which are user interface design choices that manipulate the individual into carrying out these reluctant behaviours. Additionally, companies deploy ‘sludge’, which includes practices such as making it difficult to change privacy settings or cancel subscriptions, as well as deliberately hiding key terms and conditions. In that regard, the Rule 14(3) provides the much needed safeguards against breach of consumer rights.  However, when done within ethical limits, predicted search results help consumers make their purchasing choices more easily. Therefore an overarching limitation is likely to disable the benefits that intuitive tech like predicted search results bring.
  3. Overbroad definition of ‘e-commerce entity’: Rule 3(1)(b) broadens the definition of ‘e-commerce entity’ to include  any subsidiaries as well as “related parties” of the e-commerce entity. This entails any entity associated with the e-commerce entities in any commercial capacity will also incur liabilities under the said Rules. These may include offline vendors, delivery partners et al. This creates a major hurdle because such related parties would now have to undertake the obligation to appoint a Chief Compliance Officer, a Resident Grievance Officer and a Nodal Officer [Rule 5(5)] along with other obligations mentioned in the rules, merely because they work with an e-commerce entity. Such overbroad definitions will dissuade ancillary partners of e-commerce entities from working in the e-commerce industry.
  4. Disproportionate burden of compliance placed upon e-commerce entities: Commendably, the new rule 5(1), expands the scope and applicability of the rules from only registered companies but also to limited liability partnerships. However, this broadened definition also falls short of being comprehensive since it leaves out smaller entities under the Shops and Establishment Act, 1953 who may choose to undertake sale online. Accordingly, the confusion regarding regulatory obligations of appointing a nodal officer persists. Moreover, it places upon them the additional burden of appointing a nodal officer which not only will be superfluous to domestic entities but especially be a hassle for the foreign entities and increase the cost implications of the e-commerce entities. The absence of clear thresholds further forged a conflict between the obligations under the Foreign Direct Investments (FDI) regulations, 2018 and the current rules.
  5. One size fits all approach for appointment of officers: The proposed amendments further places upon all e-commerce entities, irrespective of its size and value, the onerous responsibility of appointing a chief compliance officer, a nodal officer and a grievance officer This one size fits all approach will adversely impact small scale e-commerce entity.
  6. Rules prohibit what is already not permitted: The proposed Rule 5(17) prohibits e-commerce entities from abusing dominant position in any market. However under section 19 of the Competition Act, 2002, an entity stands to be penalised for engaging in a dominant position. It therefore ends up being redundant.
  7. Micromanagement by government, enhancing the risk of over-compliance: If redundancy in grievance mechanisms weren’t enough, the rules also include provisions for overbroad state interference under rule 5(18). This necessitates e-commerce entities to comply with any request for information under section 69 of the Information Technology Act within 72 hours. Here, not only is the type of “information” not clarified but also the overarching timeline creates the tendency of e-commerce entities to overcomply without actually resolving the issue.

Recommendations

In light of the above issues, we believe the following changes must be made:

  1. Stricter definition of ‘flash sale’: The definition of ‘flash sale’ should be modified to address the lack of clarity. To this extent, the phrase ‘ordinary course of business’ must be adequately defined (as may be found in this press release).
  2. Keep tools to reduce manipulation but allow voluntary predicted searches: We welcome the addition of clauses 14 to guard against consumer manipulation, as these will help to limit the possibility of such frauds and protect the rights of consumers online. However, we believe there is a need for clarification on the provision regarding search indexes. A proviso should be added to the Rule that allows consumers to voluntarily opt-in to receiving expected search results.
  3. Size based classification for e-commerce entities: The Ministry should not consider all entities which are engaged to fulfil orders as e-commerce entities. However, in light of the investigations into Amazon, there is also a need to protect against anti-competitive practices. Thus a classification based on the size of the entity should be used to categorise companies as e-commerce entities.
  4. Overbroad scope of compliance: The government must issue the necessary clarifications regarding the existing conflict between the FDI regulations and the liabilities enforced by the rules at the earliest.
  5. Reduce human capacity requirements for compliance: The cost implications and resource impact of the appointment of three separate officers to deal with compliance and grievances must be reconsidered. We suggest that the Ministry does not adopt such a one-size-fit-all approach and instead impose the obligation of Rule 5(5) only on those entities which have specified turn-over or large number of active users.
  6. Allow competent bodies to take action: The proposed rules will legally enable individuals to engage in forum shopping, a practice which courts have repeatedly frowned upon. While already established entities may be able to defend themselves in multiple proceedings, newly established businesses will find it difficult. Authorities under the rules may also be unable to properly determine if an entity has abused dominant position. Thus, only competent bodies should be allowed to ...
  7. Relax timelines for compliance: Compliance requirements should be on the best efforts basis, gleaned through the lens of legality, proportionality and necessity and seconded by orders of a competent court of law.
  1. Draft Consumer Protection (E-Commerce) Rules, 2020 (link)
  2. IFF’s Submissions to the Draft E-Commerce Rules (link)
  3. Read IFF’s Response to the Draft Competition (Amendment) Bill, 2020. Our Ask? Hold Big Tech Accountable dated March 20, 2020 (link)