At the end of May this year, the news broke that FlipkartIndias largest e-commerce company

had acquired the online apparel store Myntra for between !"" million and !!" million ,
the largest deal to date in the history of Indias nascent e-commerce sector# $ournalists
compared the deal to the American e-commerce giant Ama%ons &""' purchase of clothing and
shoe e-retailer (appos for )#& billion# In fact, Flipkarts founders, *achin +ansal and +inny
+ansal ,they are not related-, are former Ama%on staffers who quit their .obs in &""/ to launch
their company#
0owe1er, at a press conference announcing the deal, *achin discounted this comparison with
Ama%on# 23ur role model today is actually the Alibaba 4roup more than Ama%on,5 he said,
referring to the 6hinese internet behemoth, which made business headlines when it filed
documents in preparation for its I73, e8pected to be in August# 98perts ha1e
claimed that Alibaba could be worth around &"" billion by the end of the year, far more than
Ama%ons current MA:;9< cap of around )=> billion#
+ut there is more to the +ansals disa1owal of Ama%on comparisons than their aspirations to
Alibabas scale# *ince Ama%ons India launch in $une &")!, the company has become Flipkarts
primary competitor# Many belie1e the M?@<:A AFlipkart deal is a sign that the companies are
ramping up to hold their own against Ama%on# As Abhash ;umar, a writer who co1ers e-
commerce for ?our*tory#com, a +angalore-based business website, put it to meB 2:ather than
ha1e a three-way fight between Flipkart and Myntra and Ama%on, why not consolidate both of
them, and .ust fight off Ama%onC5
In most countries in which it operates, Ama%on runs both an in1entory and marketplace model
simultaneouslythat is, it ser1es both as a seller of its own product *<36; and as a platform
for other 1endors to sell their products# <he in1entory model allows the company to take
ad1antage of economies of scale, acquiring products in bulk and offering lower prices than
competitors# +e.ul *omaia, the India managing director of Dightspeed, a 1enture capital firm that
in1ests in numerous technology companies, e8plained in a post on E66ircle#com that in India,
too, an in1entory model could pro1ide Ama%on a better post-purchase user e8perience because
it allows 2control of the product5 and 2enables you to deli1er faster and with higher accuracy, and
respond effecti1ely to customer inquiries about shipping status,5 by cutting an additional player
out of the sales equation#
*ince Ama%on entered India in &")!, it has restricted its operations to the marketplace model
because Indian laws do not currently permit online retailers with foreign FF@GI@4 to sell
directly to consumers# ?et companies like Flipkart seem to sell a range of products to customers
while successfully ha1ing procured hundreds of millions of dollars in foreign funds o1er the past
few years#
+ut in fact, Indian e-commerce companies, such as Flipkart, $A+3@4 , Myntra and *napdeal,
ha1e had a tenuous relationship with regulations, as detailed in this *eptember &")& story in
+usinessworld# ?our*tory#com has also outlined how Flipkart circum1ented the law
in these recent posts#
In &""H, the Indian go1ernment eased regulations on foreign direct in1estment in wholesale
businesses ,+&+- and single-brand retail, as part of a gradual opening up to FGI in the country#
<hough multi-brand retail was still closed to FGI, no specific policy had been laid down on online
retail# Flipkart, which was incorporated in &""I, had a structure that made the best of this
loopholeit was generally known as a retailer, but on paper it resembled a wholesaler, with
another company, called J* :etail, functioning as its front-end, selling to customers# Jith this
structure in place, Flipkart recei1ed foreign FF@G* , which enabled it to e8pand operations#
+ut when Businessworld went to 1isit J* :etails stated headquarters in +angalore to find its
supposed director <apas :udrapatna, they found a 2small, sleepy house5 and were then
directed to a Flipkart office =A/ kilometres away# <here, an 0: representati1e said that
:udrapatna worked for Flipkart# Further, J* :etails =" percent shareholder was +; +ansal,
*achin +ansals paternal uncle, who told Businessworld that he knew 1ery little about the
business and that e1erything was handled by *achin# <his structure 1iolated, if not the letter, the
spirit of the law that was intended to restrict the influence of foreign funds o1er Indian retail
1entures#
In April and *eptember &")&, the Gepartment of Industrial 7olicy and 7romotion
released press notes clarifying that FGI in multibrand retail e-commerce was banned entirely#
<he legality of Flipkarts regulation-skirting structure now appeared considerably more
precarious#
After a &")& 9nforcement Girectorate probe into whether Flipkart was 1iolating Indian FGI rules,
in February &")!, Flipkart sold J* :etail to a group of high net-worth indi1idual in1estors led by
3nMobile 633 :a.i1 ;uchhalK in $uly &")!, it raised a further &"" million in funds# *ince then,
Flipkart has technically been operating as a marketplace, rather than a +&+ 1enturei#e#, it
charges other 1endors a commission on each sale on its site#
It is difficult to establish how much influence Flipkart has o1er J* :etail now, but a casual 1isit
to the site re1eals that more often than not, J* :etail features as the first seller on most
Flipkart products# <his ranking was based on the 2number of ratings and feedback, and number
of successful deli1eries,5 Flipkarts 7: manager 7ayal +aner.ee said when I spoke to her last
month# +aner.ee couldnt tell me what percentage of products on Flipkart featured J* :etail as
the first seller, claiming it was too 2dynamic5 a process to monitor# *he declined to tell me what
percentage of Flipkarts current marketplace business runs through J* :etail#
9-commerce companies shifty strategies will alter dramatically if the go1ernment decides to
allow FGI to any e8tent in online retail companies# In February &")!, Ama%on sent global 1ice-
president 7aul 9 Misener to meet commerce minister Anand *harma and present what The
Telegraph called a 2plea5 for 2rela8ation of foreign direct I@E9*<M9@< norms#5 <here are
indications that this may be in line with the current go1ernments intentions#
Jhile the go1ernment has indicated that limitations to FGI in retail, including e-commerce, will
continue, some news reports suggest that the go1ernment is likely to ease restrictions in e-
commerce from $uly this year #
Flipkarts recent e8pansion could be its latest adaptation to changes in the policy en1ironment,
aimed at helping it meet the challenges of a market where FGI boosts the ability of companies
like Ama%on to sell products directly to consumers# Ar1ind ; *inghal, chairman and managing
director of <echnopak, a consulting firm that specialises in e-commerce, told me that the Myntra
deal and the influ8 of new funds can be seen as an indication that Flipkart realises it 2needs to
keep I@E9*<I@4 in building scale and si%e, because the barriers to entry are not really there5
in the long term# <he company may ha1e a head start o1er Ama%on, but if regulations change to
allow Ama%on to compete as a retailer, the lead Flipkart en.oys will start to look far less
comfortable#
Introduction
India is witnessing a digital re1olution with internet becoming an integral part of its
population and a1ailability of internet in the mobile phones# Jith the decrease in the
prices for using internet, change in lifestyle in urban areas and the con1enience that
internet has brought has supported this re1olution# <he business acti1ity conducted
through electronic means falls within e-commerce# <hough there is no specific definition
pro1ided in any statute, it encompasses all business conducted by computer networks,
be it +&+, +&6, 6&6, 6&+ or +&+&6# <he ser1ices that are offered does not begin or
end with pro1iding an online platform but in1ol1es efficient deli1ery system, proper
payment facilitation and an effecti1e supply chain and ser1ice management# *o, the
business is not simple as it may seem and also in1ol1es a lot of legal issues#
<he go1ernment has considerably liberali%ed Foreign Girect I@E9*<M9@< ,"FDI"-
and as per the regulations framed under the Foreign 98change Management Act, )''',
)""L FGI is allowed on an automatic basis in e-commerce acti1ities# 0owe1er, FGI is
not permitted in Indian entities that carry out single brand retail or multi-brand retail 1ia
e-commerce# Fnder automatic route no prior appro1al of the Ministry of 6ommerce and
Industry would be required# <his bulletin will discuss certain legal issues that troubles
business in online en1ironment and also simultaneously try to analy%e if there are
solutions a1ailable to those problems#
Legal Issues
1. E-contracts: 9lectronic contracts are go1erned by the basic principles pro1ided in
the Indian 6ontract Act, )I/& ,"ICA"-, which mandates that a 1alid contract should ha1e
been entered with a free consent and for a lawful consideration between two adults#
*ection )"A of the Information <echnology Act, &""" ,"IT Act"- pro1ides 1alidity to e-
contracts# *o, both I6A and I< Act needs to be read in con.unction to understand and
pro1ide legal 1alidity to e-contracts# Further, section ! of the 91idence Act pro1ides that
the e1idence may be in electronic form# <he *upreme 6ourt in Trimex International FZE
Ltd. Dubai v. Vedanta luminum Ltd.
)
has held that e-mails e8changes between parties
regarding mutual obligations constitute a contract#
In an online en1ironment, the possibility of minors entering into contracts increases,
more so with the increasing usage of online medium among teenagers ,read minors
here- and their preference to shop online or purchase online goodsMser1ices# It becomes
crucial for an online business portal to keep such possibility in consideration and qualify
its website or form stating that the indi1idual with whom it is <:AGI@4 or entering into
the contract is a ma.or#
Stamping of contracts is yet another issue# An instrument that is not appropriately
stamped may not be admissible as e1idence unless the necessary stamp duty along
with the penalty has been paid# +ut payment of stamp duty is applicable in case of
physical documents and is not feasible in cases of e-contracts# 0owe1er, as the
payment of stamp duty has gone online and e-stamp papers are a1ailable, it can
become a possibility later that stamp duty might be asked on e-contracts as well#
<he other crucial issue is the consent and the way offers are accepted in an online
en1ironment# In a click wrap and shrink wrap contract, the customers do not ha1e any
opportunity to negotiate the terms and conditions and they simply ha1e to accept the
contract before commencing to purchase# *ection )H,!- of the I6A pro1ides that where
a person who is in a position to dominate the will of another, enters into a contract with
him, and the transaction appears, on the face of it or on e1idence adduced, to be
unconscionable, the burden of pro1ing that such contract was not induced by undue
influence shall lie upon the person in a position to dominate the will of the other# *o, in
cases of dispute o1er e-contracts the entity carrying out the e-commerce will ha1e the
onus to establish that there was no undue influence# Further, section &! of the I6A
pro1ides that the consideration or ob.ect of any agreement is unlawful when it is
forbidden by law, or is of such a nature that if permitted, it would defeat the pro1isions of
any lawK or is fraudulent, or in1ol1es or implies in.ury to the person or property of
another, or the 6ourt regards it as immoral or opposed to public policy#
. Data !rotection: *ecurity of the information pro1ided during the online transaction is
a ma.or concern# Fnder section >!A of the I< Act the N:easonable practices and
procedures and sensiti1e personal data or information :ules, &"))N ha1e been
proposed, which pro1ide a framework for the protection of data in India# Gata can be
personal, which has been defined as Nany information that relates to a natural person,
which, either directly or indirectly, in combination with other information a1ailable or
likely to be a1ailable with a body corporate, is capable of identifying such person#N <he
date can also be sensiti1e and a sensiti1e personal data consists of password, financial
information, physical, physiological and mental 09AD<0 condition, se8ual orientation,
medical records and history and biometric information# <he entity collecting data should
ha1e a pri1acy policy in place, should always obtain consent from the pro1ider of
sensiti1e information and maintain reasonable security practices and procedures#
Fnauthori%ed access to personal information and any misuse of such personal
information should be checked by the online goodsMser1ice pro1iders#
Interface with payment gateways is yet another challenge in online transactions# In
)''=, the 9F<, a retail FF@G* transfer system enabling customers to transfer funds
from one account to another and from one region to another, without any physical
mo1ement of instruments was introduced# <he banks were permitted to offer internet
banking facilities based on the +oard-appro1ed internet banking policy without prior :+I
appro1al# As a step towards risk mitigation in the large 1alue payment systems, the
:<4* was made operational by the :+I in March &"">, which enabled settlement of
transactions in real time, on a gross basis# <he :<4* *ystem is operated by the :+I# In
&""=, @9F< was introduced which was a more secure, nation-wide retail electronic
payment system to facilitate funds transfer by the bank customers, between the
networked bank branches in the country# <he enactment of the 7ayment and *ettlement
*ystems Act, &""/ empowered the :+I to regulate and super1ise the payment and
settlement systems in the country, gi1e authority to permit the setting upMcontinuance of
such systems and to call for informationMdata and issue directions fromMto payment
system pro1iders# <he I< Act pro1ided legal recognition for transactions carried out by
means of electronic data interchange and other means of electronic communication,
commonly known as Nelectronic commerceN, which in1ol1e the use of alternati1es to
paper-based methods of communication and storage of information#
&
*ome of the
initiati1es taken so far to a secured e-transaction includeB <he I< ,Amendment- Act
&""I, :+IOs guidelines on Mobile +anking and pre-paid Ealue 6ards, 4uidelines on
Internet +anking and Mobile banking guidelines# 9ssentially, the I< Act has laid the
foundation for strengthening cyber security and data protection in India with introduction
of section >!A that mandates body corporate to implement Nreasonable security
practicesN for protecting Nsensiti1e personal informationN#
!
<he I< Act formally introduces
the concept of data protection in Indian law, ushers in the concept of Nsensiti1e personal
informationN and pro1ides for fi8ation of liability on a body corporate to preser1e and
protect such sensiti1e personal information#
>
It also pro1ides for ci1il and criminal liability
for failure to protect personal data and information#
=
Further, the :+I has mandated a
system of pro1iding additional authentication based on information encrypted on the
cards but not 1isible for all online transactions# +anks ha1e also to put in place alert
systems to keep a tab on online acti1ity# *ince an e-commerce website relies on an
online mode of payment, se1eral requirements imposed by the :+I do impact them but
essentially the payment gateways# 0owe1er, while engaging such payment gateways
the contractual obligations on data protection and usage should be clearly defined#
". Intellectual !ropert# $ig%ts &"I!$"': <here are enormous possibilities of <:AG9
mark, copyright or patent infringements in online medium# 9-commerce websites are
designed and made by other parties and often the content is also created by third
parties# Fnless the agreements between the parties specifically pro1ide the I7 rights,
there can be serious ownership issues of I7:# Any usage of third party I7: should ha1e
1alid appro1als in place# In interacti1e websites, the disclaimer and I7: policy should
clearly spell out these issues and goodsMser1ice pro1iders should also keep a watchful
eye on the usage of their websites regularly# Gomain names ha1e trade mark protection
and decepti1ely similar domain names can gi1e rise to disputes# In !atyam In"oway Ltd
v. !i"ynet !olutions #vt Ltd., the *upreme 6ourt had held that Na domain name may
pertain to the pro1ision of ser1ices within the meaning of section &,%- of the <:AG9
Marks Act#N
(. Efficient deli)er# s#stem and an effecti)e suppl# c%ain and ser)ice
management: It is important to always keep consumer protection issues in
consideration in e-commerce# <he 6onsumer 7rotection Act, )'IH ,"C!A"- go1erns the
relationship between consumers and goods P ser1ice pro1iders and there are no
specific pro1isions related to online transactions# Diability for a goodsMser1ice pro1ider
arises when there is Ndeficiency in ser1iceN or Ndefect in goodsN or occurrence of Nunfair
trade practiceN# <he 67A specifically e8cludes from within scope any ser1ice rendered
free of cost# *o, if only the actual sale is taking place in the online medium, the users
will be considered as consumers under the 67A# <he goodsMser1ice pro1iders may be
asked to remo1e defectsMdeficiencies, replace the goods, return the price already paid,
compensate and discontinue the unfair trade practice or the restricti1e trade practice
and not repeat them#
Fnder the Information <echnology ,Intermediaries 4uidelines- :ules, &")),
the intermediaries ha1e the obligation to publish the rules and regulations, pri1acy
policy and user agreement for access or usage of the intermediaryOs computer resource
by any person# *uch rules and regulations must inform the users of computer resource
not to host, display, upload, modify, publish, transmit, update or share certain prescribed
categories of prohibited information# Also, the intermediary must not knowingly host or
publish any prohibited information and if done should remo1e them within !H hours of its
knowledge# In $onsim In"o #vt. Ltd v. %oogle India #vt. Ltd& the Gelhi 6ourt recogni%ed
that no in.uncti1e relief could be granted to 6onsim since it did not pass the triple test of
,i- prima facie case ,ii- balance of con1enience and ,iii- irreparable hardship but here the
decision of the court was greatly influenced by the fact that the trademarks in dispute
were generic in nature# <he court also obser1ed that though the intermediary, 4oogle,
cannot be made liable for infringement arising out of a third partyOs actions since it is not
possible to always check e1ery ad1ertisement posted onlineK howe1er, this obser1ation
was sub.ect to section !,>- of the aforesaid Intermediaries 4uidelines and 4oogle had
to act upon it within !H hours of receipt, failing which it may be held liable#
*. Ad)ertising: Ad1ertising is an important and legitimate means for a seller to awaken
interest in his products# For long, ad1ertisements were regulated by the courts,
go1ernment, tribunals, or police that depended upon the nature of each case#
Additionally, absence of a single comprehensi1e legislation created a lot of confusion in
terms of a proper code to follow by the industry and the authority to regulate or guide
the pattern of ad1ertising# In )'I=, the Ad1ertising *tandards 6ouncil of India ,"ASCI"-,
a non statutory tribunal, was established that created a self regulatory mechanism of
ensuring ethical ad1ertising practices# A*6I entertained and disposed off complaints
based on its 6ode of Ad1ertising 7ractice ,"ASCI Code"-# 3n certain occasions,
howe1er, the A*6I orders were set aside by courts as A*6I being a 1oluntary
association was considered usurping the .urisdiction of courts when it passed orders
against non-members# 4radually, the A*6I 6ode recei1ed huge recognition from the
ad1ertising industry# <he warnings issued by A*6I to the ad1ertisers against the
misleading ad1ertisements were gradually being accepted by the ad1ertisers and the
ad1ertisements were actually stopped being aired or were modified significantly to
comply with the prescribed A*6I 6ode# <he ad1ertisements should make truthful and
honest representations and a1oid false and misleading claims, should not be offensi1e
to public decency or morality, not promote products which are ha%ardous or harmful to
society or to indi1iduals, particularly minors, obser1e fairness in competition keeping in
mind consumerOs interests and a1oid obscene or harmful publication and indecent
representation of women#
+. Competition: 9-commerce has already generated a lot of competition with e1er
increasing players and acquisition of se1eral old players in the MA:;9< and has
enabled de1elopment of new ser1ices, new distribution channels, and greater efficiency
in business acti1ities# 6reation e-hubs where significant market share lies can lead to
certain competition issues if they appear to ha1e de1eloped sustainable market power
resulting from network effects andMor engaging in strategic acts to preser1e or maintain
their market power# 7otential issues for e-commerce players would be price fi8ing or
tacit collusion or anti-competiti1e discrimination or refusal of access to third parties# 9-
commerce players should refrain from collusion and e8cessi1e pricing# 3ptions for
parties to use same web platform for different kinds of productsMser1ices can gi1e rise to
different intermediaries and that can lead to collusi1e beha1ior# Market transparency
should be encouraged#
Conclusion
9-commerce websites should lay down purchasing and payment process in sequence
with absolute clarity and regular updatingMmonitoring of information pro1ided# <he terms
and conditions should not be generic but specific depending upon the nature of the
goods P ser1ices offered and they should be brought to the sufficient attention of the
consumers and pro1ide ample opportunity to read and then accept# 9-commerce
players should ensure reasonable efforts to pre1ent unauthori%ed transaction# 9-
commerce business is in nascent stage but the growth has been e8emplary# It is crucial
for e-commerce players to work towards capacity building by training employees and
alarming them against the risks discussed abo1e# Jorking and more crucially
implementing the risk management policy and strategy for o1erall risk mitigation of the
company is critical# 6onstant monitoring and e1aluating the consumer beha1ior ,li'e by
'eeping tra(' o" their "ootprints on their websites& whi(h (an also serve as an eviden(e
at a later stage- for risk assessment and taking further initiati1es for a strategic P
dynamic approach to the digital economy is crucial# At the end of the day, e-commerce
is more about strategy and business management than it is about technology# <he
online platform should not only pro1ide inno1ati1e infrastructure but also inno1ati1e and
proprietary information structures with sufficient protections and safeguards for its
users# <his will ensure the problems will remain at bay or at least the companies would
be prepared with a strategy to tackle them#
Footnotes
) 7lease see httpBMMpsalegal#comMuploadMpublicationMassocFileMGispute-:esolution-+ulletin-Issue-
EI"H"/&")"")))&"7M#pdf for details#
& For details regarding banking regulations and its e1olution, please see our bulletin of *eptember &""I
-httpBMMwww#psalegal#comMuploadMpublicationMassocFileMI7:P<960@3D34?+FDD9<I@-I**F9IQ#pdf#
! For details regarding the risk in1ol1ed in e-transaction and steps taken by :+I, please see our bulletin
of August &""' -httpBMMwww#psalegal#comMuploadMpublicationMassocFileM+A@;I@4-DAJ*-+FDD9<I@-
I**F9-IIR)&II/I&II/#pdf#
> *ection >!A of the I< Act#
= :efer to sections >!A and /&A, newly introduced# For details please see our bulletin of Gecember &")"
-httpBMMwww#psalegal#comMuploadMpublicationMassocFileM9@ewslineGecember&")"#pdf#
The (ontent o" this arti(le is intended to provide a general guide to the sub)e(t matter.
!pe(ialist advi(e should be sought about your spe(i"i( (ir(umstan(es.