Identifying the Contours of a Lending Marketplace

Aditya Iyer l finserv@vinodkothari.com

Background

The concept of a marketplace, i.e a platform where buyers and sellers meet, appears to have existed since antiquity and is one of the defining features of evolved commerce in any particular civilization (e.g the Middle Eastern and Persian ‘Bazaar’, the Ancient Greek ‘Agora’, the Silk Road, ‘Mandis’ in India, etc.). Marketplaces have evolved from being platforms of meetings where the confluence of trade occurs (such as a venue), to persons or entities actively providing a platform for such exchange and obtaining consideration for the intermediation provided. As they are rooted in the fabric of our culture, it is natural that these models will continue to appear and replicate themselves across different mediums (i.e. Physical, Online), and different sectors (such as platforms for financial services and lending, sales of second-hand goods, fashion and cosmetics, legal services, and even tuition).

The ambit of regulation here is usually to the extent of intermediation and facilitation provided, however drawing this line can become challenging for regulators when under the garb of intermediation entities begin to operate as agents, or as sellers without discharging the commensurate compliance burden. This piece addresses such a regulatory concern in digital lending marketplaces, where there is an emergence of entities using the marketplace model to offer services/features that mimic the role of an agent, or a vendor. 

Online Marketplaces and Agency

Under S.3(g) of the E-Commerce Rules 2020, a “Marketplace e-commerce entity” is an entity that provides an information technology platform on a digital or an electronic network to facilitate transactions between buyers and sellers. The DIPP Press note 2/2018 differentiates between a marketplace mode of e-commerce and an inventory model of e-commerce, where a marketplace model is characterized by its providing of a platform to facilitate the transactions, as opposed to an “inventory model” where there is ownership exercised over the goods and services. At the risk of oversimplifying, it can also be stated that Marketplaces under the IT Act are also “intermediaries”, and a “pure marketplace” would be one that is limited to the function of facilitation and intermediation. The precise scope of facilitation and intermediation are covered in sectoral regulations, where the regulator considers what degree of facilitation will cross this threshold (for example under the DIPP Press Note, and the Digital Lending Guidelines)

Marketplace entities, to the extent that they are facilitating a transaction between the two parties, are not vendors/sellers. Marketplace entities are not agents either. In law, an agent is a person employed to do any act for another, or to represent another in dealings with a third person. For one to be considered the agent of another, the terms of agency don’t need to be expressly stated in a contract, so long as the general terms constituting the agency relationship are consented to, i.e. the parties have agreed to what amounts in law to such a relationship.  The key features of a principal-agent relationship viz. the liability of a principal for acts of the agent in the course of the contract, the power to bind the principal to contracts, make representations on behalf of the principal, etc. are not found in a marketplace model. A marketplace cannot represent, negotiate, or make dealings on behalf of the seller. Similarly, the seller cannot be held liable for the actions of a marketplace in the course of its representation.

 Because determining agency is a question of substance over form, Lending Service Providers are categorized as Agents (insofar as their dealings with third parties on behalf of the Regulated Entity are concerned) because the scope of their activities would include customer acquisition, acquisition support, underwriting support and servicing. Undertaking such functions on behalf of a lender/seller and actively promoting them in their dealings with a third party constitutes an agency, and this “triangular relationship” is one of the principal features of an agency contract. Therefore, LSPs are regulated to the extent of their agency, and the compliance burden is placed on the REs contracting with them. 

But, there is an emerging class of marketplace lending entities, facilitating lending by offering a platform and algorithms matching the needs of the Borrower with the Lender/Regulated Entity, that purport to offer services not requiring them to register or comply with the RBI Regulation. Insofar as these services, are within the domain of facilitation and intermediation, and do not include promoting or representing a particular lender to borrowers, taking variable returns, offering any kind of credit risk mitigation/guarantees, or assurances for minimum returns/recovery of monies they would stay within the ambit of the marketplace model. Such services in relation to the marketplace entity’s dealing with the customer will be an extension of the principal-agent relationship with the regulated entity, and insofar as they concern dealings with the principal/regulated entity themselves (such as offering guarantees) is akin to the role played by a del credere agent. Intermediaries do not take a “skin in the game” with respect to the sellers, it is very uncharacteristic of their function which is fundamentally premised on neutrality. 

Conclusion

In the digital lending space, entities that wish to operate using a marketplace business model would necessarily need to operate like a marketplace by limiting the extent of their services to providing intermediation, and facilitation, which can be matching the needs of the borrowers and the lenders through an algorithmic service,  and offering a platform for the transaction.   However, they cannot offer any kind of credit risk mitigation/guarantees or assurance for minimum returns/recovery of monies because those services take them outside the scope of a marketplace. Consider financial services on ONDC, which operating in the marketplace model is not an LSP, because the scope of its function is limited to providing a “technology that facilitates discoverability and interaction of the lender apps registered on the network with those of the LSP (Buyer App)” (more on this here). These entities may not actively promote the products of an entity either, and in the traditional lending marketplace, entities such as Business Correspondents that provide this function are considered agents. Where such services are offered, continuing to call oneself a marketplace is not the panacea to compliance.  

1. Department of Industrial Policy & Promotion, Press Note No. 2 (2018 Series). 
2.  Information Technology Act, 2000, S.2(1)(w)
3.  Kunal Bahl and Ors. vs. State of Karnataka (07.01.2021 – KARHC) : MANU/KA/0010/2021.
4. The Indian Contract Act, 1872, S.182.
5. Life Insurance Corporation and Ors. vs. Rajiv Kumar Bhasker (28.07.2005 – SC) : MANU/SC/0441/2005
6. Guidelines on Digital Lending
7. Bharti Cellular Limited vs. Assistant Commissioner of Income Tax, Circle 57, Kolkata and Ors. (28.02.2024 – SC) : MANU/SC/0144/2024.
8. Singapore Airlines Ltd. vs. C.I.T., Delhi (14.11.2022 – SC) : MANU/SC/1489/2022.