Update: Our sources within Flipkart say that no such raid has taken place. We’ve written to Flipkart for an official statement.
Update: The Enforcement Directorate had raided Flipkart offices on November 30, to investigate alleged violation of FDI regulations, reports Businessworld. Citing an an independent source who confirmed the raid, the report states that the Enforcement Directorate had confiscated several important documents and computer hard drives and submitted it to the cyber forensic department for investigation.
In a statement to the publication, Flipkart has however stated that it is co-operating with the authorities and doesn’t comment on the specific developments. The company also reiterated that it is in complete compliance with the laws of the land.
The report also mentions that Flipkart had changed its management and company holding structure in September 2012. It had appointed two new directors – Sujeet Kumar, who is currently serving as the president of operations, Flipkart, and Rajiv Kuchhal, who was previously the Chief Operating Office at OnMobile, while Bal Krishna Bansal, Director of WS Retail (which operates Flipkart.com) and paternal uncle of the founder Sachin Bansal had resigned from the board.
On a related note, MediaNama along Arkay & Arkay had recently released a free paper explaining the structuring of investments eCommerce businesses in India and a simplified overview of the government rules that cover FDI in multi brand retail and eCommerce, in order to educate entrepreneurs and investors about the many different structures that are being used by Indian E-commerce businesses to raise investment.
Earlier (Nov 27): The Indian government has referred Flipkart and Bharti Walmart to the Enforcement Directorate for alleged violation of FDI regulations. The Minister of State for Commerce & Industry Dr. S. Jagathrakshakan in a written reply to a question in the Lok Sabha, mentioned that the Reserve Bank of India has informed that matters related to Bharti Wal-Mart/ Cedar Support Services Limited and M/s Flipkart Online Services Pvt. Limited, respectively, have been referred to the Directorate of Enforcement for further investigation, and that violation of FDI regulations was covered by the penal provisions of the Foreign Exchange Management Act, 1999 (FEMA).
We’ve written to Flipkart for a response, and will update this post when we hear from them.
A lot of ecommerce companies were taking the dual company route to go around FDI restrictions imposed by the government. Companies usually work around by setting up a B2B company where 100% FDI is allowed, and keeping inventory, technology and promoters’ ownership the in B2B company, while creating a B2C company which issues invoices and collects payments from customers; the B2B company billing B2C company at arms length. According to many media reports including one by BusinessWorld, Flipkart also operates its B2C operations under WS Retail and wholesale B2B operations under Flipkart Online Services(FOS). So while sourcing is done via FOS, the customer invoicing is through WS Retail.
Earlier this year, the Government had permitted Foreign Direct Investment in multi brand retail upto 51%, but had clarified that the policy did not extend to e-commerce. In a press note, the government had clearly stated that “Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multibrand retail trading.”
Note that during the #Nama conference, Flipkart co-founder & COO, Binny Bansal had stated that nothing had changed on the e-commerce segment with the new FDI rules. However, he had avoided commenting on the legality of e-commerce businesses operating by bypassing FDI regulations, and had said that the company complied with the regulations.
With the action, the government has, in a way, given a signal that it’s aware of e-commerce companies circumventing the FDI restrictions by way of creating multiple entities, and can penalize them. But isn’t it an industry wide phenomenon, and not just restricted to one player?