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Friday, September 25, 2020

Explained: The allegations and antitrust probe against Flipkart

Why has the NCLAT asked the CCI to investigate the business practices of Flipkart? What are the 'abuse of dominant position' allegations against the online marketplace giant?

Written by Aashish Aryan , Edited by Explained Desk | New Delhi | Updated: September 1, 2020 9:54:48 am

Walmart-owned Flipkart has moved the Supreme Court against an order passed by the National Company Law Appellate Tribunal (NCLAT) on March 4, which had asked the Competition Commission of India (CCI) to initiate a probe against the company for “abuse of dominant position”.

What was the case against Flipkart?

In 2018, a group of more than 200 retailers, which used to sell their products on sites such as Flipkart, Amazon, Snapdeal, and others, approached the CCI with a complaint that Flipkart was adopting predatory pricing mechanisms, which resulted in losses for small retailers.

The CCI’s mandate is to “eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade in the markets of India”.

In their complaint, these retailers, under the umbrella of All India Online Vendors’ Association, told CCI that Flipkart bought products from small retailers and sold them at a discounted price to WS Retail Services Private Limited – and subsequently, WS Retail re-sold the same products on Flipkart’s site.

The vendors association also alleged that Flipkart and WS Retail were using a veiled corporate structure, which had a direct conflict with other manufacturers selling on their platform. WS Retail too, had been founded by Flipkart founders Sachin and Binny Bansal.

The vendors association also asked CCI not to clear any pending “combinations” until final orders were passed in the case.
In 2018, Flipkart was in talks with Walmart for sale of majority stake in its business. The deal went through in August 2018, and Walmart bought 77 per cent stake in Flipkart for $16 billion.

What was CCI’s decision?

The CCI held in a detailed order that according to the market structure in 2018, it could not be said that any one player was “commanding any dominant position”, since a low entry barrier had allowed many e-commerce players to enter the market.

However, the CCI also noted that new players would find it difficult to breach the marketplace presence gained by incumbents, despite the low threshold for entry.

In its observations, CCI said that e-commerce was still in a relatively nascent stage in the country, and commissions to retailers formed an important part of that marketplace model.

“Recognizing the growth potential as well as the efficiencies and consumer benefits that such markets can provide, the Commission is of the considered opinion that any intervention in such markets needs to be carefully crafted lest it stifles innovation,” the CCI said.

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Why did the NCLAT set aside CCI’s order?

In its order asking the CCI to constitute a Director General-level probe against Flipkart for abuse of dominant position, the NCLAT relied up on a judgment by the Income Tax Appellate Tribunal (ITAT).

The ITAT had in that judgment noted the observations of an income tax assessing officer who had probed a senior vice president of the company. The senior vice president had, according to ITAT’s judgment, accepted that the “strategy of selling at a price lower than the cost price (predatory pricing) is to capture market share and to earn profits in the long run”.

Though the ITAT had ruled in favour of Flipkart and set aside a tax demand against it, it had in its judgment also observed that the manner in which Flipkart was operating in the market could be said to be an abuse of dominant position, and that the e-commerce company had resorted to “predatory pricing”, the NCLAT said.

Since the All India Online Vendors’ Association had “prima facie” made out a case against Flipkart for abuse of its position, the same should indeed be probed, the appellate tribunal ruled.

What now for Flipkart?

Flipkart has approached the Supreme Court against the probe into its alleged abuse of dominant position in the Indian e-commerce market.

Though the company had told the CCI that WS Retail had stopped selling on Flipkart as of 2017, the anti-trust body will still have to probe the nature of predatory pricing that has been alleged against the company.

The CCI will also have to probe the allegations of the corporate veil around Flipkart and its associates, and whether they had any conflict of interest with other retailers and manufacturers on the platform.

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