India’s e-commerce sector has attracted scrutiny by the authorities. This is in view of accusations of violation of FDI and tax laws, among other things. To these have been added alleged competition law violations.

There have been complaints that e-commerce companies engage in “predatory pricing” or “below cost pricing”. They have been faulted merely for offering discounts to consumers.

While there may have been problems with online sales, those pointing to the need to invoke the Competition Act are missing a basic point: the importance of freedom of pricing.

The Act only prohibits “predatory pricing” by companies with a dominant position in a relevant market in India. If the company is not dominant, predatory pricing, as a matter of law, is inapplicable. Determining whether a company has a dominant position involves a complex blend of economic analysis, law, business realities, consumer preferences, and so on.

Vertical agreements As a general rule of thumb, the Act is completely neutral on pricing by any company if it is not dominant and doesn’t agree on pricing, either horizontally with its competitors or vertically with downstream entities in the distribution chain. It’s the vertical agreements, for example between a manufacturer and a retailer, on minimum prices that may be the real area of focus as the debate between online and “bricks and mortar” stores rages on.

A manufacturer that requires sellers not to sell below a certain price, or not to offer discounts, could actually be flirting with disaster under the Act as it could be engaging in unlawful minimum resale price maintenance (RPM). Broadly speaking, RPM refers to the practice of trying to fix the resale price of goods through any agreement, arrangement or understanding to the effect that the price to be charged on the resale by the purchaser shall be the price stipulated by the original seller. Minimum RPM can thus be viewed as vertical price-fixing, and that’s where the problem may be with respect to manufacturers and e-commerce companies.

Companies should keep in mind that the concept of “maximum retail price” or “MRP” for pre-packaged commodities is very different from minimum RPM. MRP is the maximum price that can be charged by the retailer for a pre-packaged commodity.

By contrast, the Competition Act’s prohibition on minimum RPM covers any agreement that sets a minimum (or fixed) price if such agreement causes or is likely to cause an appreciable adverse effect on competition in India. Accordingly, any agreement, understanding or arrangement that contains an RPM provision, without a clear statement that all downstream entities are free to charge a price below the amount stipulated by the manufacturer or upstream seller, can be deemed void.

In addition, minimum RPM provisions or practices raise the possibility of the Competition Commission of India imposing significant fines.

The general rule in a vertical arrangement (such as between manufacturers and distributors/retailers) is that if title to the product changes hands, the upstream seller of the product (eg, manufacturer) should not set a floor or fixed price for the product without clearly allowing the downstream company (eg, distributor/retailer/e-commerce company) to sell at a lower price. It is important to keep in mind that the concept of “agreement” under the Competition Act is extremely broad and covers formal written agreements as well as an informal “understanding” or “arrangement”. Thus, if a manufacturer tells retailers that “you cannot sell our product at less than ₹50” or that “you must sell our product at ₹50 and you cannot offer any discounts”, serious issues under the Act can arise.

Breaching the laws In jurisdictions such as the EU, minimum RPM is considered a hard-core breach of EU competition laws and companies engaging in minimum RPM have been heavily fined. Similarly, under the Act, companies can be fined up to 10 per cent of their average turnover for the last three financial years, in addition to the minimum RPM arrangement being deemed void if the companies are found to have breached the Act. Given the CCI’s track record thus far, heavy fines for companies engaging in minimum RPM may not just be a theoretical possibility.

All companies doing business in India, whether online or “bricks and mortar”, need to carefully examine their contracts and agreements, as well as their business practices, to determine whether they involve minimum or fixed prices for onward sales of products. If there are written contractual provisions to this effect, there must also be a clear statement in the agreement that the retailer is free to charge a lower price than that desired by the manufacturer.

It is also vital to remember that business practices that are not in writing could also amount to prohibited minimum RPM. For example, if a manufacturer threatens to stop supplying a retailer if the retailer does not adhere to the manufacturer’s desired pricing, this may also raise serious minimum RPM issues.

The current debate may have served to highlight the real competition law problems in India’s retail sector. The basic premise that should guide this debate is that in absence of a dominant position, all sellers should be able to sell their products at any price they wish to sell (up to the MRP).

The writers are with Khaitan and Co

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