In the Indian E-commerce industry, a start-up company should adopt a suitable legal structure depending on the following factors:
a) Tax and personal liability, b) FDI norms, and c) Absence of Data protection law.
This blog discusses the structural issues that impact the legislative position of the Indian E-commerce companies. One aspect of the issue is the need for a finer definition of the term E-commerce, and other terms that have relevance to online trade such as a ‘market-place business model’. Other
aspect of the issue is the lack of a strong data protection law which is highly necessary for monitoring the Ecommerce companies in the online retail industry.
Tax and Personal Liability:-
Tax liability and personal liability are crucial issues because a start-up company in the E-commerce sector has higher chances of rapid business growth. With high pace of business growth, the company will enjoy higher paid-up capital and large number of investors but at the same time the company will face higher personal and business liability.
We suggest that an E-commerce start-up company should choose the limited liability partnership as their legal structure. In the limited liability legal structure: firstly, the legal liability of the company owners is limited to the income earned or an investment committed to the business and secondly, the tax liability of the individual partner is limited to the income made by the business.
The biggest advantage of forming a Limited Liability company is the ability of business owners to issue an Initial Public Offering (IPO) and raise a paid-up capital meaning that they can expand and grow their business. The risk of raising the paid-up capital is low because the liability of the business partners remains limited.
There for, a limited liability company serves 2 purposes: a) it enables the possibility of business growth in the near future without any risk of personal liability and b) it protects the business owners by limiting their liability only up to their level of investment and tax liability.
The second factor of FDI norms applies to the E-commerce start-up depending on the type of business model chosen by the company. If the company chooses to use the inventory model, then it cannot access 100% Foreign Direct Investment; but if the company chooses to use the market-place model, then it has the right to access 100% FDI.
The E-commerce company which follows an inventory model can buy goods from the wholesaler and make those goods available for sale on its online portal. On the other hand, the E-commerce company following a market-place model serves as an interface between the merchant and the customer.
An inventory model is more like an additional distribution model used by the wholesaler for sale of goods; and the market-place model is more like an E-commerce business which enables the online trade of goods for merchants and customers. Although, both models are assisting in the success of E-commerce business, the inventory model is the window of a wholesaler to sell its goods, and so it cannot be defined as a B2C type of business. The inventory model is defined as B2B type of business.
On the contrary, the market-place model allows for a more direct link between the customer and manufacturer, and so it can be defined as a perfect online business. The E-commerce companies which follow the market-place model are categorized as the B2C type of business and they can access 100% Foreign Direct Investment.
In some scenarios that occurred in the recent past, E-commerce giant companies such as Flipkart were under strict surveillance by the Enforcement Directorate (ED) because the company represented itself to be the follower of a market-place business model to raise capital via foreign direct investment route. In this case, the offline retailers filed a complaint against Flipkart due to fear of rising competition from the E-commerce giant. According to the brick and mortar retailers,
Flipkart was offering heavy discounts by operating another company under the inventory model and at the same time, Flipkart was also running another E-commerce venture under the market-place model for 100% access to Foreign Direct Investment (FDI).
Absence of Data Protection Legislation:-
The third factor of Data protection is as important as the earlier ones, because there are no separate laws in place to protect the consumer or the E-commerce Company from breach of data protection.
Currently the risk of data protection is covered by the Information Technology Act 2000. A separate set of laws that are meant to serve as data protection legislation are not yet designed by the government.
Currently, E-commerce business is considered similar to the brick and mortar business by the Indian government. Therefore, a same type of legislation governs both types of businesses – online retail and brick & mortar. The present legislation that govern the Indian E-commerce industry include:
Competition Act 2002, The Consumer Protection Act 1986 superseded by a more comprehensive – Consumer Protection Bill, 2015, and the Indian Technology Act, 2000, superseded by a more robust – Indian Technology Rules, 2011.
Legislative Governance and Recent Law-Suits
In reference to the recent lawsuit filed by Paytm against Uni-commerce, we can more clearly understand the need for a data protection law in the E-commerce industry Paytm has made an allegation against Uni-commerce which states that the latter has stolen critical data of its merchants and customers. This database of sellers was available to Uni-commerce because the same sellers also used Uni-commerce portal for easy organization and implementation of their e-business activities.
Secondly, Paytm has also made another allegation against Uni-commerce stating that its logo is also being misused by the latter to lure more customers.
Similarly, Uber Cab Company has also filed a lawsuit against Ola Cab Company and the allegation is that Ola has made false rider accounts and also used Uber’s customer data.
Both the cases mentioned above are suggesting the fact that there is lack of a strong legal structure that should ideally govern the E-commerce industry. The legal structure includes: a presence of robust legislation and a well-organized business model.
Are Ola and Uni-commerce really guilty!
In case of the first law-suit which is filed by Paytm, we can observe the reason why Uni-commerce (if found guilty) stole Paytm data. It could be that Uni-commerce mother company – Snapdeal is unable
to run its business by simultaneously following both inventory as well as market-place business model. Therefore, it requires more access to merchant database.
In the case of second law-suit filed by Uber, we can observe the reason why Ola (if found guilty) wrongfully accessed the customer’s personal information on the Uber Cab portal. It could be that
Ola is unable to maintain a robust online presence such as Uber and also that Ola assumes that there will not be any serious legal consequences by breaching the intended data protection.
Currently, the above mentioned E-commerce companies are under scrutiny by ED (Enforcement Directorate). We can certainly hope that the recommendations of the appointed committee would bring about a positive change in terms of the legislative environment that governs the E-commerce industry.