The Karnataka transport department will step up its crackdown on ride-hailing services Uber Inc. and Ola (ANI Technologies Pvt. Ltd) for the practice of surge pricing, a senior official said, dealing a blow to these firms, which count Bengaluru as one of their biggest markets.

Surge pricing allows Ola and Uber to raise fares in an area when demand is higher than supply. Ola and Uber contend that surge pricing helps in increasing the number of drivers on road when demand peaks.

The transport department has seized about 20 vehicles affiliated to both services over the past week for allegedly charging consumers more than the maximum ₹ 19.50 per km mandated by the state government, said H.G. Kumar, additional commissioner for transport and secretary, state transport authority. The drive will be stepped up if Ola and Uber decline to abide by the law, he added

“Every day, we are receiving complaints on Ola and Uber charging consumers higher than the limit set by the government. We cannot allow surge pricing. The enforcement will be beefed up in the coming days," said Kumar.

Bloomberg reported the development on Saturday.

The Karnataka government has been trying to prevent surge pricing. The state government, which issued the Karnataka On-demand Transportation Technology Aggregators Rule, 2016, on 2 April, said aggregators cannot charge passengers more than the fare fixed by the government.

In October, the Union ministry of road transport issued guidelines for ride-hailing services, identifying them as on-demand information technology-based transportation aggregators and not taxi companies, although it is up to the states to accept or reject this.

According to the guidelines, the aggregators must not own or lease any vehicle, employ any drivers or represent themselves as a taxi service, unless also registered as a taxi operator. Taxi operators are to maintain a minimum fleet size, office space and parking space for all taxis, among other requirements, Mint reported on 14 October.

Barring Karnataka, no other state has cracked down on such services over fares. However, Delhi chief minister Arvind Kejriwal said in a tweet on Sunday that the state government is planning “strong action" against these companies after receiving complaints.

Moreover, it is not immediately clear if the ride-hailing services will come under the ambit of the foreign direct investment guidelines for e-commerce firms issued by the central government in March, which does not allow marketplaces to offer discounts or influence product prices.

The fare mandated by the Karnataka transport department is ₹ 19.50 per km for air-conditioned cabs and ₹ 14.50 for ones without air conditioning.

Incidentally, the cap mandated by the state government allows both Ola and Uber to charge multiples of their fares.

For instance, UberGo, Uber’s cheapest option, is priced at ₹ 7 per km in Karnataka, which implies that it gives Uber the provision to charge consumers up to 2.7 times the cheapest rate. Ola’s cheapest variant, Micro, costs at ₹ 6 per km, which essentially allows surge pricing of up to 3 times the cheapest option.

According to Kumar, the cabs booked over the past week exceeded the upper limit mandated by the government. “We cannot allow online aggregators to charge consumers beyond that (the upper limit) in the name of surge pricing," said Kumar.

Ola and Uber did not respond to emails seeking comment.

Last week, Uber submitted its objections to the Karnataka transport department on regulations for the online taxi-hailing services.

“The government of Karnataka has taken a step forward in laying down sector-specific regulations for mobility platforms like Uber. We have submitted our objections to the transport department in connection with the notified regulations and are engaged with the government. The government of Karnataka has shown immense support for businesses that harness technology and innovation and we are hopeful of progressive outcome," Bhavik Rathod, general manager, south, Uber, said on Wednesday.

Uber is operational in 26 cities and Ola in 102, but industry executives say both get more than 80% of their business from the top 10 cities.

Consequently, an operational hurdle in a key market such as Bengaluru may impact business, especially at a time when both firms are locked in a battle for market supremacy.

According to legal experts, Ola and Uber can mitigate the impact of a crackdown by the state by sticking to the upper limit of ₹ 19.50, which still allows them the provision to charge consumers up to 2.5-3 times the actual fare for their cheapest offering.

“What the government has done is decide up to what extent you can have surge pricing. Now, to the extent that somebody is well within the realm of that limit, I don’t think they can be booked for surge pricing. In the event there is a supply deficit, then what is the maximum extent to which they can charge, is the extent specified by the regulator," said Ganesh Prasad, partner at law firm Khaitan & Co.

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