How Amazon Continued To Play Fast and Loose With E-Commerce Regulations In India

Recently, a Reuters report disclosed some startling facts about Amazon, one of the world’s largest e-commerce players, and its regulatory breaches in India. Among other details, it involves exchanges in company documents and other instruments hinting at strategies to marginalise small retailers at the expense of bigger ones for the purpose of profiteering.

Let us give you a lowdown of this red hot revelation!

What’s the Story?

The report begins with an indictment of senior Amazon executive and erstwhile White House press secretary Jay Carney who was advised by the company to refrain from disclosing information about 35 Amazon sellers who accounted for about two-third of the value of all goods sold on the company’s website in India. Two of them alone contribute 35% of the GMV — and them being Amazon affiliates themselves doesn’t help!

As is clear, one of the cardinals laws in the free trade economy is antitrust, which aims at ensuring a fair-playing field to every business in equal terms regardless of their influence or capitalisation over the markets they operate in. And for a company who markets itself as a saviour of India’s small and informal retailers, this isn’t good news.

Moreover the Reuters report indicates Amazon is complicit in ensuring this failure of fair play.

How?

The disclosure highlighted the company’s blatant disregard for domestic e-commerce law (we’ll get to that shortly) by exerting control over the inventory of some of its biggest sellers even though they are represented overtly as independent sellers.

For example, the company entered into a joint venture with Catamaran Ventures, an entity affiliated to N.R. Narayan Murthy, the founder of Infosys Ltd., to create a seller named Cloudtail. Cloudtail is officially represented as an independent seller operating on Amazon’s platform. However, a February 2015 report mentions it as a “Special Merchant” which must be “launched, stabilised and grown into a profitable venture”. Amazon owns 49% of Cloudtail.

A Closer Look At the Alleged Regulatory Excesses

An important aspect to keep in mind about e-commerce businesses is the distinction between the two separate business models they operate on. The first one is called a marketplace model, which is based on the platform working as an intermediary or facilitator between the buyer and seller. It simply connects the two parties and charges a commission from the sellers for the service it provides. Examples are Naaptol and Shopclues which are the biggest names in online marketplaces in India at present.

The second is called the inventory model where an inventory or repository of goods and services is owned by an e-commerce platform and sold to consumers directly. Example: Myntra.

Under Indian law (Consumer Protection Act, 2019, E-Commerce Rules 2020 and the FDI Policy 2015), foreign direct investment up to 100% is allowed under the automatic route in B2C (Business-to-Consumer) e-commerce. Amazon qualifies under this category. However, the FDI policy of India only permits investment in the marketplace model of e-commerce. Which means, if Amazon decides to be a seller instead of an intermediary, that is in direct violation of the norm.

Consider the Cloudtail instance. The recent charge against Amazon is that it targeted Cloudtail to account for 40% of Amazon sales and build it into a “$1+B business” in 2015. In order to achieve this, the company actively helped Cloudtail build key relationships with major tech retailers like Apple, Microsoft and OnePlus, augmenting a higher number of smartphone sales. In layman’s terms, this would be a direct conflict of interest wherein Amazon acts as both the intermediary as well as the seller of goods/services.

The Competition Angle

Talking of smartphones, in August 2020, Amazon beat Flipkart for the first time in smartphone sales in India by pocketing a 47% market share in the product. The report alleges these increased sales performances to have risen from deep discounts offered to a select group of sellers, undercutting scores of small and independent retailers. It paints a squalid picture of offline smartphone owners being hit hard by the boost in online sales climbing to a point wherein customers would come into their stores, sample their products and use the store’s Wi-Fi to compare prices on the e-commerce sites where they would eventually buy them from.

This isn’t the first time Cloudtail has raised regulatory concerns for Amazon. As far back as in 2014, New York Times reported that with its dependence on Cloudtail, the company could very well be violating the prevalent rule set against a single seller accounting for more than 25% of the sales on an e-commerce marketplace.

Last year, the Competition Commission of India had ordered an investigation into Amazon and Flipkart’s anti-competitive practices based on dissimilarities in discounted sales and commission margins between different categories of sellers. Cloudtail was shown to have paid 6.1% commission fee compared to other retailers, some of whom paid as high as 28.1%. Faced with rising appeals, the Government had directed the RBI and the Enforcement Directorate to take necessary action against Amazon and other companies for flagrant violation of the FDI Policy and the Foreign Exchange and Management Act (FEMA), 1999. (Let’s not even get into the investigations and penalties sought over country-of-origin non-compliance issues!)

The Fork In the Regulatory Road

Amazon has categorically denied these charges and emphasised on the “unsubstantiated and factually incorrect” nature of the story. However, as the company continues to expand its business presence in a country wherein e-commerce is poised to become a $200bn-large industry in the next five years, it is difficult to say how far it will be willing to clip its wings for the sake of absolute and unfiltered compliance.

In any case, with an FTC investigation pending back home in the US and an ongoing legal battle against the RIL-Future merger, the new and imminent investigations springing up on continued regulatory violations in India doesn’t bode well for Amazon.

But hey, when life gives you a 42% increase in annual revenue for FY20, all that is left for Amazon to do, is perhaps, focus on shoring up its compliance metrics and tame away from violations any further, unless it plans on witnessing the same fate as its Brazilian namesake (so much drama got punched in this statement!).

(Originally published February 19th 2021 in transfin.in)