Was Flipkart just caught red-handed violating Press Note 2 regulations?

The recent face-off between Flipkart / Walmart and GOQii has blown the lid off Flipkart & Amazon's worst kept secret - that both these marketplaces regularly distort the sales price of goods sold on their platforms.

This is in direct contravention of India's laws for FDI-funded e-commerce, which requires marketplaces to be only technology platforms and prohibits them from influencing - directly or indirectly - the sale prices of goods available on the platform.

The fast-evolving issue was first reported in Times of India.

On May 27, 2019, when it shared that Flipkart and GOQii were in the midst of a legal spat. GOQii, which is in the business of smart wearables had sent a legal notice to Flipkart on the very next day challenging the deep discounting of its products by Flipkart, which GOQii contended was in violation of FDI norms governing e-commerce in India.

It further added that such predatory pricing by Flipkart was harming GOQii’s business, as its sales on other platforms and through other sellers were being disrupted due to such price distortions by Flipkart.

The matter suddenly acquired grave overtones, as a copy of the complaint reached both Department for Promotion of Industry and Internal Trade (DPIIT), which is the nodal ministry for e-commerce) and the Competition Commission of India (CCI).

Flipkart defended its practices by writing to both DPIIT and CCI, saying that prices were determined by the resellers and not by the marketplace. However, Vishal Gondal of GOQii hit back saying that he has evidence in the form of emails and WhatsApp texts to show that Flipkart has full control on pricing.

Gondal called upon Flipkart not to use its position of dominance to compromise the business of small businesses. He further called out Flipkart on not acting as per its contract with GOQii.

As Flipkart went into damage control mode, it received another blow, when the Bombay Civil Court restrained Flipkart and other sellers associated with it, including Retailnet and Tech-Connect from selling GOQii products.

The ad-interim order was issued on 27 May 2019 to prevent further loss to GOQii owing to deep discounting by Flipkart and its associated sellers. The Court issued notices to Flipkart and Walmart and the case is likely to draw attention to the rampant price distortion and market controlling tactics of some marketplaces.

The matter could not have come at a worse time for Flipkart. Walmart’s $16 billion acquisition of 77% stake in Flipkart last year faced a lot of opposition and scrutiny, both in the media and amidst the trade community.

While CCI approved the deal in August last year, the fear around predatory practices is becoming a reality.

Last year in December, DPIIT issued Press Note 2, which was framed specifically to prevent supply-side manipulation by FDI-funded marketplaces. The updated FDI guidelines prohibited marketplaces from allowing sellers, whose inventory it controlled or where it had made equity investments directly or indirectly through group companies, to sell on the marketplace.

This expanded set of rules, which came into effect from 1st February 2019 were resisted tooth and nail by both Amazon and Flipkart, who lobbied through the US government and various trade bodies to scrap or defer the new rules. However, an assertive and confident Indian government stood its ground and implemented the new guidelines.

However, both Amazon and Flipkart found a quick go-around the new norms, by converting hitherto group companies to unrelated entities by simply rejigging their corporate structures and altering shareholding patterns to, thus, ensuring compliance with the letter, but not with the spirit of the law.

The same sellers, controlled by the marketplaces and now ostensibly unrelated to the marketplace continue their corner inventory and dictate prices. In fact in an interview in April 2019, Amazon's CFO clearly stated that the impact of the new laws was minimal.

India is also formulating a new e-commerce policy and the continuing price manipulation by large and dominant marketplaces is an important point under discussion. With a new government taking power, the new e-commerce policy is expected to progress quickly.

The revelation of such price manipulation is likely to further the government's resolve to clamp down on continuing violations of FDI guidelines, especially relating to control on inventory and thinly camouflaged discounting.

As millions of Indians start buying online, the government is wary of allowing FDI funded dominant players like Amazon and Walmart-owned Flipkart from crowding out the small Indian sellers. With job creation and boosting startups taking weightage in the government agenda, it can hardly allow India's MSMEs from being decimated by FDI funded e-commerce platforms, who are retailers at heart.

Interestingly, CCI is also conducting a deep "market study" of the e-commerce sector and all large players have received questionnaires in this regard.  

The e-commerce sector in India is not only growing rapidly but is also now demarcated between genuine marketplaces (who work with third-party sellers) and those who must appear like a marketplace, even as the bulk of their sales come from their "own" sellers.  

The discount fuelled market dominance of branded goods segment by large marketplaces is likely to stutter as India implements the laws which are aligned to its need to boost local MSMEs and domestic retailers. The GOQii episode may well be the tip of the iceberg.

Update: An Amazon India spokesperson has responded to the article saying , "there is zero truth to reports that Amazon is not abiding by Press Note 2 regulations. We have a very high compliance bar and abide by all Press Note 2 regulations and other applicable laws in India."