This note analyses aspects of pricing control in the “marketplace” model of e-commerce. The “market-place” model is an important context for Indian foreign exchange control regulations because foreign direct investment is not allowed in the other model i.e. “inventory-based”. A market-place model of e-commerce is defined as: “providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller” [Regulation 15.2.3(d) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017) (“FDI Policy”)].

One of the conditions of permitted FDI in the market-place model is that the market-place entity cannot “directly or indirectly influence the sale price of goods or services” [Regulation 15.2.3(m) of FDI Policy]. The FDI Policy does not lay out any criteria or illustrations of this restriction.

The Competition Commission of India (“CCI”) recently had an opportunity to address the practice of “deep discounts” in the context of its order under the Competition Act, 2002 allowing acquisition of Flipkart Private Limited (“Flipkart”) by Wal-Mart International Holdings, Inc. (“CCI Order”). One of the representations by various trade associations and retailers contesting the Flipkart-Walmart combination was the conduct of Flipkart in offering “deep discount and preferential treatment” to certain e-tailers.

The CCI impliedly acknowledged the factual basis by noting the Income Tax Appellate Tribunal’s order dated April 25, 2018 in Flipkart India Private Limited v. Assistant Commissioner of Income-Tax (“ITAT Order”) wherein the tribunal held that discounts offered by the wholesale arm of Flipkart, i.e. Flipkart India Private Limited (“Flipkart Wholesale”), to other sellers which list their products on Flipkart, can be classified as revenue expenditure.  The ITAT Order, as recorded in the CCI Order, had stated that Flipkart Wholesale sells goods at discounts to the retail sellers who sell at Flipkart, they in turn list such discounted products on the website of Flipkart. In an interesting outcome of the Order, these representations contesting deep discounts and preferential treatment by Flipkart were in this sense acknowledged by the CCI without being ruled upon. The CCI acknowledged as follows, while on various grounds:
“the limited concerns in the representations that may merit examination from competition perspective were deep discounting and preferential treatment to select e-tailers in online marketplaces of Flipkart.” The CCI ultimately averted ruling on the practice of offering deep discount [by Flipkart in this case] as this did not have “any nexus to the competition dimension of the proposed combination”.

Further, the CCI did not pronounce on the discounting practices because the representations were made in relation to the proposed acquisition under Section 6 of the Competition Act (Regulation of combinations) which focused only on the legality of the combination. Based on the facts on record, the CCI observed:

“The discounting practice of Flipkart and its preference, if any, to select etailers in its online marketplaces are not specific to the Proposed Combination, as they are already prevalent in the market even without the proposed acquisition by Walmart. In other words, the issues about common customers of Flipkart are not directly or indirectly related to the Proposed Combination and thus, the same is not likely to alter the competition dynamics as it exists today.” This observation cannot be interpreted in plain terms to imply that widespread custom is a defense rather it can indicate a view that this may be a potentially problematic discounting practice, even if it did not alter the combination analysis.

It is worth noting that the Government of India has very recently issued a draft e-commerce policy – Electronic Commerce in India: Draft National Policy Framework, which inter alia proposes that the existing FDI Policy restriction (as touched upon earlier in this note) on marketplace models of not influencing prices should be extended to group companies of such market places. The policy is subject to industry comments and a second draft is expected shortly. This policy paper was not cited in the CCI Order.

The CCI Order has not made any adverse ruling on the discounting practice. What is still relevant to note is CCI was not inclined to make such a ruling only on technical grounds [i.e. the representation was against the combination and this practice does not impact the combination analysis]. Reading the sub-text of the CCI Order, the CCI did seem to acknowledge this practice and in at least a couple of different contexts [such as para 12 of the CCI Order] indicated that this may amount to a vertical restraint and even the FDI Policy can address this issue “to ensure that online market platforms remain a true marketplace providing access to all retailers.”.