P K Singh, Competition Commission of India
This is an extract from the second edition of the E-Commerce Competition Enforcement Guide - published by Global Competition Review. The whole publication is available here.
E-commerce in India: Competition Commission of India perspective
In the past, the Competition Commission of India received several cases by aggrieved bricks-and-mortar shops that were losing their customers to e-commerce companies. Their main claim has been predatory pricing by e-commerce companies to attract consumers, irretrievably change consumer behaviour and consequently oust them from the markets.
While the Commission is cognisant of the impact on the bricks and mortar shops and owners because of aggressive practices of e-commerce players, the assessment is guided by competition law and economics principles enshrined under the Competition Act 2002 (the Act). The Commission recognises that e-commerce platforms operate heavily on network effects and thus, economies of scale lie at the heart of their functioning. Such economies of scale and consequent network effects arguably help the e-commerce players to bring down their operational costs, which, as claimed by these players, leads to consumer benefits. In assessing these cases, the Commission has applied an integrated approach guided by the economic principles as well as the legal provisions. Given the distinctive nature of these markets, the Commission, in its decision-making, duly considers the efficiencies, and strives to ensure that any intervention does not cripple these innovative industries and players. The Commission also keeps itself updated on international developments and the approaches being adopted by international agencies to deal with the various issues. Much emphasis is laid on capacity building for better understanding of these markets.
The Competition Commission of India chapter in One of the cases that was under investigation has now been now decided. In this case, an e-commerce player, Snapdeal, alleged that Kaff, a renowned kitchen appliances manufacturer, dissuaded online selling of its appliances. Kaff apparently displayed a caution notice on its website alleging that its products sold by Snapdeal through its website were counterfeit and were being sold without its authorisation. Further, there was an email from Kaff to Snapdeal suggesting that Snapdeal correct the prices at which it was selling the Kaff appliances. This was Flipkart was alleged to have given preferential treatment to a certain retailer. It was acquiring goods from various sellers and selling the same to WS Retail Services Private Limited at a discount, with WS Retail, in turn, selling such goods as sellers on Flipkart’s internet platform, flipkart.com. It was also alleged that Flipkart was using its dominance in the relevant market by leveraging its position to enter into another market by way of extending discounts and manufacturing products under private labels. First, the Commission did not find Flipkart to be dominant in the market for services provided by online marketplace platforms for selling goods in India. It was observed that none of the players in the market commanded any dominant position at that stage of evolution of the online market. In the absence of dominance in the relevant market, the alleged issue of abuse was not assessed under the Act. Second, the Commission also took note of the submission made by Flipkart denying the case of contravention of the Act. It was submitted that Flipkart India did not impose any exclusivity requirements on its business-to-business (B2B) customers with respect to either procuring the products from Flipkart India or with respect to reselling those products to any third parties, or selling on or through the Flipkart marketplace. The Commission also noted that the structural link with WS Retail existed only until 2012, after which WS Retail was no longer a seller on Flipkart Marketplace. The matter was closed as no case of contravention was made out against Flipkart.
Recently, the Commission has also received two e-commerce cases pertaining to online selling of hotel rooms. While one case is yet to be decided by the Commission, the other case ( In the OYO case, the allegations were made by a budget hotel that was using the branding services of OYO to achieve better visibility on online (as well as offline) modes. The complainant budget hotel alleged that OYO abused its dominant position and imposed unfair conditions on it through the agreement between them. Besides not finding OYO to be dominant in the relevant market, the Commission also did not find the conditions imposed by it to be unfair.
Additionally in 2018, the Commission approved certain deals involving e-commerce players. One such big-ticket deal was Wal-Mart International Holdings, Inc’s acquisition of shares of Flipkart Private Limited in May 2018. Walmart Group’s subsidiary in India (Walmart India Private Limited), is engaged in wholesale cash and carry of goods (B2B sales). On account of restrictions under the Foreign Direct Investment Policy (FDI Policy), Walmart India could not engage in direct business to consumer (B2C) sales. In the proposed combination before the Commission, Walmart group would hold substantial shares and control over Flipkart, which, inter alia, is engaged in B2B sales and the provision of online marketplace platforms to facilitate B2C trade. With regard to the issue of horizontal overlaps in the proposed combination (i.e., both the parties being engaged in B2B sales), the Commission found that Flipkart’s operations were relatively strong in the mobile and electronic product sectors, which constituted a substantial majority of its business, whereas Walmart’s operations in the same sectors were insignificant. On the other hand, Walmart’s operations were focused on groceries but Flipkart was not present in this segment. Both the parties did have some horizontal overlap in lifestyle products, which included skin care, hair care, oral care, baby and feminine hygiene, personal hygiene, clothing, and shoes and accessories. But again, the combined value of sales of the parties in this segment was considered low and relatively insignificant to the size of the markets for the said products. The Commission was therefore of the view that the proposed deal would not alter the current market structure. It was further noted that, apart from the presence of large players, such as Reliance Retail, Metro Cash and Carry India and Amazon wholesale, the unorganised sector also posed a significant constraint on organised wholesalers. Further, with regard to vertical overlap (i.e., B2C sales), it was noted that the FDI Policy restricts the parties from engaging in the same. It was noted that Flipkart offered its online marketplace platform to facilitate B2C sales while Walmart was not engaged in any such services. The Commission, therefore, was of the view that there was no vertical overlap either.
On 7 December 2017, Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon.com Inc (ACI), filed for acquisition of a 5 per cent stake in Shoppers Stop Limited. Shoppers Stop, a multi-brand retailer, is engaged in the business of selling clothing, accessories, beauty care products, baby care products, home decor, etc., through the ‘Shoppers Stop’ and ‘Home Stop’ branded stores. It is also engaged in the retail of books, stationery, etc., through its subsidiary, Crossword Bookstores Limited. ACI, through its Indian and overseas subsidiaries, has business operations in India, which, inter alia, relates to the retail sector, payments processing and cloud computing.
The acquisition was approved by the Commission because of its insignificant transaction value. The aspects that were taken into consideration were that Shoppers Stop has several competitors in the market, including Future Retail, Aditya Birla Fashion, Arvind Lifestyle, Reliance Retail and Home Centre, offering similar products and services (i.e., in the retail sector). While in the case of ACI, the presence of other players, such as Flipkart, Hands on Trade, Reliance Retail, Walmart, Metro Cash and Carry India, providing similar products or services was considered to cause competitive constraints in the market. As for digital payments services, ACI had a much bigger competitor, namely, Paytm Payments Bank Limited. The Commission was of the opinion that the proposed combination was not likely to have any appreciable adverse effect on competition in India and, therefore, approved the same.
The existing merger control in India is based on asset and turnover threshold. Given the peculiar nature of business models that have emerged in the digital space including e-commerce, entities often escape the scrutiny of the Act owing to meagre assets and turnover. Nevertheless, such transactions can have equally adverse implications for competition, as observed in the traditional industries, and it is imperative that these transactions are at least assessed by the Commission. To that end, it is being deliberated whether new parameters can be introduced beyond existing assets and turnover thresholds for merger control in India to allow scrutiny of such transactions. This would, however, require an amendment to the Act.
Future efforts of the Commission: research and development in the e-commerce sector
The shift of economic transactions to digital space has implications for businesses, consumers and markets. New distribution methods and business models have emerged, affecting the traditional and existing mechanisms. Such developments may prompt enterprises to resort to contractual restrictions or vertical restraints on dealers or retailers in the form of selective distribution agreements or the exclusion of pure online players from distribution networks. Online marketplaces also pursue aggressive growth strategies, which may involve deep discounting and imposition of restrictive conditions on manufacturers and service providers, such as parity requirements. Such practices can potentially affect the market structure and the intensity of competition, thus warranting regulatory and competition scrutiny.
In order to ensure effective competition across the levels of supply chains of goods and services in the face of rapid growth of e-commerce, a closer scrutiny of the trends and developments in e-commerce and of the arrangements and agreements between the various players in the supply chain, in particular, are the need of the hour. Thus, there is a need for active market supervision to ensure that new trends and practices in these dynamic markets, which may be affecting competition adversely, are identified quickly.
Against this background, the Commission has commissioned a market study into the e-commerce sector in India to develop a better understanding of the functioning of e-commerce in the country and its implications for markets and competition. The study is necessary given the novel issues and challenges that digital markets bring forth for competition regulation.
The objectives of the study on e-commerce in India are:
- to study market trends with a particular focus on emerging distribution methods and strategies in response to e-commerce;
- to understand business practices and contractual provisions in e-commerce, their underlying rationale and implications for competition;
- to identify impediments to competition, if any, relating to e-commerce; and
- to ascertain enforcement and advocacy priorities for the Commission in e-commerce.
The market study is designed by the Commission and is being implemented by an external agency that has been engaged for the purpose. It is a combination of desk research, market survey and stakeholder consultation. Qualitative and quantitative information is being collected from secondary and primary sources. The study team is holding consultation meetings with enterprises and industry associations followed by a questionnaire survey among a range of stakeholders throughout the country. The sample size of the study is around 238 enterprises.
The enterprises concerned include e-commerce platforms, manufacturers, wholesalers and retailers, hotels, restaurants and payment systems. The study intends to cover such products where the growth of online commerce has been the most significant, including both goods (such as electronics, mobiles, lifestyle, grocery, etc.) and services (travel and hospitality, payments, restaurants, food delivery, etc). The focus areas of the study include the emerging trends in business models and distribution mechanisms, market structure and business practices, including contractual provisions and vertical restraints. A workshop on e-commerce will also be held where all relevant stakeholders will be invited to share their views on an open platform and deliberate on the preliminary findings of the study.
The Commission has adopted a two-pronged approach in the e-commerce sector. First, it is envisaged that the e-commerce study will help bridge information gaps that currently limit the understanding of e-commerce in terms of policy and regulatory needs. It will help in providing a clear and complete documentation of the functioning of the e-commerce sector in India, which could be used not only by the Commission for the purposes of competition law enforcement and advocacy, but also by the government for policy and other regulatory purposes.
Second, the cases dealt with by the Commission in the digital space reveal its non-interventionist approach generally, unless some tangible harm to the Commission becomes apparent. This cautious approach has been devised keeping in mind the ever-evolving nature of the e-commerce industry and also ensuring that remedies do not worsen the existing market situation. Nevertheless, the Commission is taking a rigorous approach to understanding the digital economy market in order to develop a more effective enforcement system.
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