Introduction
Over the past few years, there has been a significant surge in the development of Quick Commerce platforms such as Blinkit, Zepto, Swiggy Instamart etc., as it heightened consumer reliance on the convenience of ordering daily necessities from the comfort of their homes.
The unique business models of these Quick Commerce platforms, relying on dark stores and complex ownership structures, has highlighted the absence of a comprehensive regulatory framework in India and has drawn scrutiny from regulatory bodies such as the Competition Commission of India (CCI), the Department for Promotion of Industry and Internal Trade (DPIIT), and the Food Safety and Standards Authority of India (FSSAI) etc.
To substantiate further, the All-India Consumer Products Distributors Federation (AICPDF) has raised concerns with the CCI and DPIIT about breaches of foreign direct investment (‘FDI’) regulations by the Quick Commerce platforms. Additionally, there have been multiple instances where these Quick Commerce platforms have been investigated for regulatory non-compliances, including violations of food safety standards and labour laws.
This article explores the legal challenges within the Quick Commerce sector, evaluates India's regulatory readiness, and highlights key legal considerations for these platforms. It is essential to note that these challenges primarily arise owing to the unique features of quick Commerce being supply through dark stores and complex ownership structures.
Often the Quick Commerce model uses strategically placed dark stores, which function as warehouses or storage areas and are stocked based on consumer demand. Located near customer bases, with their placement adapting to demand in the specific area, these stores only handle online orders without engaging in traditional retail operations.
Quick Commerce platforms often do not own the dark stores themselves. In some cases, the stores are owned independently by separate entities, while in others, the platform is licensed to external entities who operate the dark stores. This diversity in business models creates complex ownership structures, complicating enforcement of compliance.
Regulatory issues
Recently, the regulatory bodies have expressed increasing concerns about the operational models of Quick Commerce platforms, questioning their alignment with the existing legal frameworks. Consequently, these platforms are under increased scrutiny to address non-compliance issues, protect consumers and employees, and ensure fair competition and market integrity. Some of the major issues in this sector are discussed below:
1. Issue relating to Foreign Direct Investment
It is important to understand the legal provisions governing FDI in the e-commerce sector to identify the potential challenges in the business model. Rule 6(a) of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’) read with Article 15.2.2 of the table to Schedule I and Para 5.2.15.2.3 of the Foreign Direct Investment Policy, 2020 states that:
*100% FDI under automatic route is permitted in marketplace model[1] of e-commerce and
*FDI is not permitted in inventory-based[2] model of e-commerce.
Upon analysing the Quick Commerce model, a notable ambiguity arises regarding whether these platforms truly operate under a marketplace model. In a traditional marketplace model, the platform serves as a facilitator between sellers and consumers, providing buyers with the option to choose from multiple sellers. However, in the case of Quick Commerce platforms, consumers often lack any choice of seller, thereby gravitating this unique business model more towards an inventory-based model than a true marketplace model.
In an inventory-based model, the platform itself holds and manages the stock, directly selling to consumers, which contrasts with the marketplace model where the platform merely connects buyers with multiple independent sellers.
As discussed earlier, FDI is prohibited in the inventory-based model of e-commerce. Therefore, if Quick Commerce platforms fall within the purview of inventory-based model, then any foreign investment would be violative of the exchange control regulations. Such violations could lead to penalties under Section 13 of the Foreign Exchange Management Act, 1999.
2. Anti-competitive practices
Recent concerns have led to increased scrutiny of Quick Commerce platforms by the CCI, primarily due to:
*Exclusive Contractual Agreements: Quick Commerce platforms have been entering into exclusive agreements with specific suppliers, potentially creating an unfair market advantage.
*Predatory Pricing Strategies: These platforms have been accused of adopting predatory pricing strategies to dominate the retail market, potentially driving out competition.
To mitigate CCI scrutiny, Quick Commerce platforms should reassess their contractual arrangements and pricing policies to examine issues such as predatory pricing, seller exclusivity, deep discounting etc., and adopt measures to ensure that anti-competitive claims do not crop up. It is worthwhile to note that most of these anti-competitive practices are also prohibited under the Indian FDI framework for e-commerce.
3. Issues related to storage, handling and disposal of food, drugs, cosmetics and hazardous goods
The FSSAI has identified several violations in the operations of dark stores associated with Quick Commerce platforms, including:
*Failure to comply with disclosure norms, such as not displaying expiry dates on packaged food items;
*Misleading product advertisements that are inconsistent with the information provided on product labels;
*Consumer complaints regarding the short shelf life of packaged food items at the time of delivery etc.;
*Improper storage of cosmetic products alongside food items, leading to contamination risks;
*Food handlers working without the required protective gear (headgear, gloves, and aprons), constituting direct violations of FSSAI's hygiene regulations etc.
The dark stores stock and handle a wide range of products which inter alia include hazardous materials, cosmetics, food products etc. This means that a host of Indian laws such as food safety laws, drugs and cosmetics laws, environmental laws and local trade licensing laws become applicable to them. Consequently, it is of utmost importance that storage, labelling, handling, transport and disposal related regulatory compliances pertaining to such products are identified as well as complied with by the Quick Commerce platforms. It is pertinent to note many of these regulations may also contain monetary penalties and prosecution provisions.
4. Issues related to Consumer protection
Unlike traditional retail stores, Quick Commerce platforms lack transparency due to the inaccessibility of dark stores to consumers, which prevents them from directly observing operations. There have been complaints from consumers regarding products sold being beyond the expiry date or close to expiry date, of sub-standard quality or future dated products etc. Another issue that crops up is on the opaqueness regarding the actual seller’s name on the platform and lack of a grievance redressal mechanism. This exposes, not just the seller but the platform as well, to potential litigation under the Indian consumer protection laws.
Recurring claims of regulatory violations within the Quick Commerce sector have sparked concerns regarding compliance and enforcement. Hence, it is pertinent for Quick Commerce companies to take note of key laws applicable to them and put in place appropriate compliance measures, as discussed below.
Way Forward
Some potential considerations and solutions are outlined below:
*Reviewing and Restructuring Business Models: While it can be argued that its high time that amendments to the existing foreign investment regime are made to suit the unique needs of this sector, however, before the regulations are adapted it is imperative that Quick Commerce platforms ensure their business models and ownership structures are fully aligned with the existing FDI framework. It is advisable to conduct a thorough review of the business model to determine whether it is consistent with the characteristics of a marketplace model and its attendant conditions (such as deep discounting, predatory pricing, equity and procurement thresholds between sellers and platform), as opposed to inventory-based model and ensure that FDI norms are not flouted.
*Clear Contractual Responsibilities and Accountability: Since multifarious regulatory laws are applicable on Quick Commerce, it is crucial that platforms clearly demarcate and delineate legal compliances and contractual obligations among the stakeholders (such as the platform, seller, dark store owner, distributor/ manufacturer etc.) with respect to procurement, storage, labelling and transportation of goods. These should be backed up with strong, unambiguous indemnity clauses in favour of the platforms should there be any regulatory non-compliance and consequential penal provisions are invoked by regulators.
*Robust Standard Operating Procedures (SOPs) across the supply chain: Apart from implementing a proper contractual framework, extensive business SOPs should be in place to ensure practical compliance with regulatory requirements across the supply chain of Quick Commerce. These SOPs must address all key aspects of the business model, from operational workflows to compliance with quality and safety standards and other applicable regulations.
*Establishing transparency in consumer dealings and grievance redressal mechanism: Amongst other things, the most crucial aspect to mitigate any potential consumer claims in the hands of platforms is to ensure transparency in dealings with consumers as regards the actual seller and requisite product information. Additionally, a proper grievance redressal mechanism and other product quality checks must also be put in place. This will not only mitigate the risk of consumer disputes and enhance trust in the platform in the long run.
*Employment Structures and Legal Responsibilities: The employment framework within Quick Commerce platforms must distinctly outline the responsibilities of the platform itself as well as any third parties/contractors for compliance with applicable labour laws. Most importantly, when engaging workforce on a contractual arrangement, these platforms must evaluate whether they assume the role of a principal employer and attract the consequential liabilities under the Indian contract labour regulatory framework. It is also crucial that proper indemnities in favour of platform/ seller must be built into contracts for any non-compliances on the part of contractors. This becomes even more pertinent in view of the new labour codes which are soon to be implemented by the Indian government.
*Industry Representation: Quick Commerce sector is set to play a critical role in the Indian e-retail space. In view of this, Quick Commerce players must identify any regulatory gaps and ambiguities (especially in the extant FDI framework) which are stifling the growth of the sector and must be addressed by the regulators. Representation before the regulators seeking clarity or amendment in the law can be a potential solution.
[The first two authors are Partners while the third author is an Associate in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] ‘Market place model of e-commerce’ means providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.
[2] ‘Inventory based model of e-commerce’ means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
