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Internet law: skirmishes ahead

October 20, 2015 12:02 IST

As the new ecommerce paradigm works its way through multiple sectors of the economy it is likely to encounter
legal challenges, writes Ajit Balakrishnan.

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he only time business executives like me meet lawyers is

when some business associate makes us mad because of some
imagined or real transgression of theirs or, vice versa, when a
business associate gets mad at us for some imagined or real
transgression of ours.
So, it was a pleasant experience, earlier this week in Delhi, to sit
in a room of about a hundred lawyers and conjecture together
the state of Indian laws as they apply to the internet and
ecommerce.
There was, as expected, the usual wonderment of some people
about the "valuations" that fledgeling ecommerce start-ups get,
how enterprises run by people barely out of their teens and
making large losses could attract eye-popping valuations from apparently sane private equity investors.
I was tempted to refer such people to the work of economist Carlota Perez who, in her book, Technological Revolutions and
Finance Capital, offered a scholarly explanation for such apparently irrational behaviour of investors by pointing out that this
has been going on for more than a hundred years.

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hus, when a new economic paradigm such as the steam-driven railway engine arrived in 1845, financiers took large bets
on its potential and such large bets provided the money to make the new paradigm work: many private railway companies
were floated in the London Stock Exchange to raise capital for the cost of buying the right-of-way to build railway tracks, the
cost of railway stations, the cost of steel for the rail and the cost of the engines and coaches. Such was the exuberance that it
was called "rail mania".
Not surprisingly, the wild valuations of the railway companies could not last and many collapsed, but the railway system got
built.

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Similar manias happened when building canals was all the fashion and, more recently, in the 1997-2000 period when the
telecom sector was booming and was called the "dot com mania".
All such manias see the influx of many players and when the inevitable crash happens, a few remain to prosper -- but more
importantly, the infrastructure for the new paradigm gets built.

hat I did point out was that there are a number legal skirmishes that lie ahead of us as the new ecommerce paradigm
works its way through multiple sectors of the Indian economy.
The first skirmish is already under way as multiple retail trade associations have approached courts for relief from the
relentless onslaught that their business face from the new e-retailing start-ups.
The bigger picture behind this is that India has a multi-tiered distribution system for consumer goods, particularly for consumer
electronics.
Goods flow from a manufacturer, usually in China, to an importer in India, from there to a wholesaler in each of our big metro
cities, onward to town-level distributors and finally to multiple small retailers in each town.

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In this process, a total markup of up to 20 per cent on factory prices is common.

he new ecommerce companies and their investors see a great opportunity in this juicy 20 per cent margin by bypassing
many levels in this chain and selling directly to consumers.
The only problem is that this "inefficient" distribution structure is a means of livelihood for about 25 per cent of our working
population and a political push-back against these ecommerce companies may come some time soon.
Then there is the impending skirmish in the area of Competition Law.
India, like many other countries, has been struggling for years on how to deal with companies that dominate some markets
and then behave unfairly with consumers and others. The Monopolies and Restrictive Trade Practices (MRTP) Act, passed in

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Internet law: skirmishes ahead - Rediff.com Business

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1969 to deal with this, loosened a little bit in 1991, and was replaced by the Competition Act 2002.
In the MRTP era, just being dominant in a market was considered ugly; under the new act, you must act like a monopolist to
be considered ugly.
The problem is that many "Information Markets" exhibit a winner-take-all tendency. India, and the world, has to figure out how
such winner-take-all processes (called "Network Effects" by scholars) work and which parts of it amounts to "acting like a
monopolist".

hen there is a conceptual skirmish ahead: the superstructure of our internet and ecommerce industries is built on Section
79 of the Information Technology Act 2008, which gave birth to the concept of the "Information Intermediary". (I wrote that
section personally as a member of the expert group and had to assure some sceptical civil servants to "trust me" to see it
through).
Defence against a liability under this section crucially relies on the concept of the "due diligence defence".
Under this concept, if you can demonstrate that you have taken reasonable steps to avoid a prohibited event, then you have
protection from liability.
For example, when an ecommerce marketplace displays a product listed there by a merchant, it has no liability for, say, a
defective product sold, if it can demonstrate that it has received an undertaking from the merchant that they would list only
high-quality and non-defective products and that it continuously educates it people and its merchants' people about this
process.
I spent that morning in Delhi quizzing the assembled lawyers on whether or not there is any part of Indian law that sanctifies
"due diligence defence", but did not get a clear answer.
Ajit Balakrishnan is the author of The Wave Rider, A Chronicle of the Information Age. You can reach him at
ajitb@rediffmail.com

Ajit Balakrishnan / Rediff.com

Source:

Tags: MRTP, Ajit Balakrishnan, India, London Stock Exchange, Carlota Perez

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