FDI policy on e-commerce: Online firms cannot win the game by blaming govt but by finding a way around regulations

Why blame policymakers or government when the retail sector has been facing resistance of opening up to big players, particularly from multi-brand retail since 2006? This article traverses through the backdrop of government’s knee-jerk policy changes due to which marketplaces have had to change their business models/pricing.

The new Foreign Direct Investment (FDI) policy prevents online marketplaces (and all associated e-commerce entities) from holding any equity interest and control over inventories through related companies that sell on their platform to avoid vertical foreclosure and exclusivity.

Under this policy, the company that operates the marketplace cannot itself be a retailer offering goods to the final consumer. Thus, Amazon/Flipkart /online marketplaces cannot maintain inventory and sell goods on the marketplace as a retailer. Its role is limited to a platform connecting retailers with the final consumers.

Considering the fact that the retail sector gives direct employment to 30 million-plus people formally and informally, it has huge social and political influence. This backdrop is important to appreciate the recent FDI announcement for online market places because from the adventures of multinational companies trying to enter MBR, the e-commerce majors should have learned their lessons on managing policy hurdles while investing and scaling up in India.

We witnessed a similar script being played out with online cab aggregators in the recent past and we saw government reacting with surge pricing or state governments like Maharashtra imposing a fleet of a minimum 1,000 and a maximum of 4,000 taxis creating chaos amongst Uber and Ola drivers.

Even Competition Commission of India (CCI) circumvented the market analysis that would reason out the legitimacy of such disruptive business models and their market conduct, what otherwise should have involved a constructive dialogue among the operators, investors and the CCI to shape the economic and regulatory policy in the first place.

 FDI policy on e-commerce: Online firms cannot win the game by blaming govt but by finding a way around regulations

Representational image. Reuters

As a result, due to policy and regulatory flux, a stable and sustainable growth of the sector gets hampered that sends wrong signals to all stakeholders alike. For instance, due to knee-jerk policy changes, marketplaces are always tweaking their business models, investors face hurdles to price risk-adjusted returns and vendors are unable to enter into long and stable contracts.

The Indian e-commerce sector is expected to touch $200 billion in the next 10 years. The policy will not just impact online marketplaces such as Walmart-owned Flipkart, Amazon, but other B2B and B2C e-commerce players in different domains like, Paytm Mall, Urban Ladder, Lenskart, food delivery apps and aggregators.

But why have the digital/technology companies not overcome the challenges to navigate an uncertain regulatory landscape? Are their business strategies sustainable without a long term legal / regulatory strategy? An obvious reason: While these e-commerce businesses confronted a variety of similar legal issues faced by traditional brick-and-mortar companies, they resist regulations.

They did not proactively manage their challenges with awareness of divergent regulatory approaches. They only reacted to knee jerk FDI policy changes, court litigation alleging their business structure was violative or predatory pricing that threated the offline retail businesses. They did not confront the reality that the range of legal issues to consider and manage would continue to grow, and ignoring this reality could lead to financial and regulatory risks and liabilities / penalties or unauthorised exploitation of a company’s intellectual property.

Their ex-post strategy has limitations. As they faced notices of regulatory authorities and courts, they employed a separate policy/government relations manager to counter the litigation and regulatory hassles. This role may not be that of a visionary to mitigate risks from policy grey areas but would require firefighting.

The reluctance of digital/technology companies to invest time and resources to navigate an uncertain regulatory landscape is more to be blamed than the policy itself. Online commerce is a rapidly evolving sector with myriad technology and social implications.

Governments the world over are facing an uphill challenge to appreciate all its nuances in a comprehensive policy framework and therefore they are expected to react with a policy that will always sound work in progress. Therefore, the onus lies with these online commerce majors to work out a proactive discussion and engagement framework with the government on regulation.

Their existing ex-post strategy to navigate regulatory hurdles has limitations that often leads to troubleshooting in the face of notices of regulatory authorities and courts that demands resources to counter the litigation and regulatory hassles.

The writing was clear on the wall from some early signs, as discussed in this article. The leadership of such rapidly growing entities ought to have evaluated their regulatory and legal risks as they chased valuations. However, probably due their internal constraints or misplaced priorities, they missed this opportunity to choose their options mindfully and apply a corrective approach.

Learning some lessons from the past, the more important inference would be: Instead of waiting for the government that is still shaping its point of view to react and for courts that are forced to intervene in knee-jerk manner, e-commerce majors will need to take proactive measures to fill the gaps. There are many areas between traditional brick and online retail that can be approach from a conciliatory or complimentary standpoint and that should become the basis for this proactive approach.

It is not possible to build a sustainable business in an unsustainable policy environment. All business models rely on certain external conditions. Most important among these are a country’s economic policy and regulatory framework. Competition is now universally acknowledged as the best means of ensuring that consumers have access to the broadest range of services at the most competitive prices.

The report of the high-level committee on competition policy and law, popularly known as the Raghavan Committee, explains that often consumer interest and public interest are considered synonymous, but they are not, and need to be distinguished. In the name of public interest, many governmental policies are formulated which are either anti- competitive in nature or which manifest themselves in anti-competitive behaviour. If the consumer is at the fulcrum, consumer interest and consumer welfare should have primacy in all governmental policy formulations.

The 11th Planning Commission report states that promotion of consumer welfare is the common goal of consumer protection and competition policy. An effective competition policy lowers entry and exit barriers and makes the environment conducive to promoting entrepreneurship, which also provides space for the growth of small and medium enterprises and consequent employment expansion. If applied properly, they have a complementary effect despite different approaches in regulating.

Competition in the digital economy is a concern for competition authorities around the world. The competition policy is more of a proactive policy that must be strategically used by new business models to get validation of their price and non-price market strategies. A more transformative impact can be made by working proactively to find holistic solutions around an avalanche of new regulations. That is, do not divorce your digital strategy from legal and regulatory strategy. Instead, manage regulatory hurdles first, before investing, by sensitizing the regulatory authorities about the new paradigm in your ecosystem.

(The writer is a specialist in competition, commercial and regulatory practice. She tweets @anupamsanghi)

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Updated Date: Feb 27, 2019 10:03:05 IST