The Enforcement Directorate is investigating Flipkart and Amazon for alleged violation of foreign exchange law, it has informed the Delhi High Court, per Business Standard. A case under the Foreign Exchange Management Act (FEMA) has been registered against the two companies, the ED told the court, which was hearing PIL that claimed e-commerce companies were violating FDI norms. The PIL, which was dismissed by the court yesterday, sought a probe into the violations it alleged.
The ED submitted to the court that the “department has already registered and initiated investigation under the provisions of FEMA against the two companies to ascertain whether they have been contravening any provisions of FEMA or contravening any rule, regulations, notification, direction or order issued in exercise of the powers under FEMA….”
Filed by NGO Telecom Watchdog, the petition claimed that Amazon and Flipkart are circumventing FDI norms and violating Press Note 3 of 2016 by creating multiple entities and routing their stock at cheaper rates. Flipkart and Amazon the petition said, buy goods in bulk from manufacturers and make small sellers noncompetitive, thus influencing prices. Additionally, the petition claims that the two have created several other group companies to divide their discounts and losses.
Developments at Flipkart and Amazon after Press Note 2
The new FDI in e-commerce (Press Note 2 of 2018) regulations were notified in December 2018, and came into effect within a month on February 1st. The new rules superseded the Press Note 3 of 2016, and inserted a new restrictions prohibiting sellers having equity participation from the marketplace or its group companies from selling on the marketplace. It also put a cap 25% on inventory purchase by vendors from marketplace entities, among other things.
Both Flipkart and Amazon had sought another few months to comply with the requirement, an extension which the DIPP did not meet.
Amazon reduced its ownership stake in Cloudtail from 49% to 24% and ceased to be an Amazon group company, making it compliant with the new regulation. Amazon said it would similarly offload its stake in Appario, which was a joint venture between Amazon and the Patni Group.
- The CCI approved Amazon and Samara Capital’s acquisition of Aditya Birla Retail’s More supermarkets, after initially asking whether the deal was compliant with the new FDI in e-commerce regulations. A few days later, CAIT demanded that Commerce Minister Suresh Prabhu probe and stay the deal.
- Amazon India’s Pantry service was temporarily suspended once the FDI in e-commerce policy came into effect on February 1st.
- Over a dozen small sellers exited or suspended their accounts on Amazon last month since they were unable to manage deliveries and logistics on their own after the new policy came into effect
Right before the regulation kicked in, Walmart Inc had warned of “significant customer disruption” if the implementation date was not delayed. Flipkart CEO Kalyan Krishnamurthy had said the rules required the company to redesign its platform in a compressed time-frame.
- Flipkart’s sales volume reduced by a third and delivery times became longer right after the new rules kicked in on February 1st.
- Earlier this month, Flipkart appointed half a dozen companies as intermediaries between its wholesale unit and some preferred sellers to get around the 25% cap on direct purchases. Among the new intermediaries are Sports LifeStyle and Premium LifeStyle, and Fashion India who will purchase from Flipkart and supply them to preferred sellers like SuperComNet, OmniTech and others.
- Before these entities were appointed as intermediaries, some of the above-mentioned sellers had already reduced direct purchasing from Flipkart by 10%.
The Draft National E-commerce Policy
The draft National E-commerce Policy (pdf) was released by the DPIIT last month for public consultation. The government had formulated a draft e-commerce policy earlier, a copy of which leaked to the public. The final version was not made public.
The new e-commerce policy uses the terms ‘e-commerce’, ‘electronic-commerce’ and the ‘digital economy’ interchangeably, since there’s no universally accepted definition of e-commerce, it said. Per the policy, e-Commerce includes buying, selling, marketing or distribution of goods (including digital products) and services (through electronic network). It defines e-commerce marketplaces as digital platforms on which goods (physical or digital) or services, are sold. “An e-commerce marketplace is expected to provide all-round benefits in comparison to its physical counterpart, by increase in access and economies of scale in operation.”
The new policy also aims to demarcate what constitutes a marketplace model and what comprises an inventory-based model of sale and distribution, and states at the outset that “A situation of capital dumping is to be strongly discouraged… The FDI policy, also takes into account interests of domestic manufacturers/traders/sellers/MSMEs/start-ups and seeks to create a level playing field in retail.”
- “Online marketplaces should not adopt business models or strategies which are discriminatory, that is, which favour one or few sellers/traders operating on their platforms over others.
- The policy mandates “fair and non-discriminatory treatment of all the stakeholders, including MSMEs and start-ups, operating on a marketplace” since MSMEs and startups cannot afford significant marketing campaigns.
- The policy places customs route on product shipments from abroad, and proposes an “integrated system that connects Customs, RBI and India Post to be developed to better track imports”
- It mandates e-commerce sites and apps available in India to have registered business entity in India as the importer on record
- It introduces anti-counterfeiting requirements for sellers who have to provide their details such as contact details, address, email and phone number on the marketplace website
- It requires the platform to enter into agreements with each sellers and obtain guarantee of authenticity and genuineness of the products, and also provide for consequences of violation of the same.
- It makes marketplace intermediaries responsible for measures to prevent “online dissemination of pirated content”, and requires them to take down access to alleged pirated content after being notified of it.
Read a complete summary of the policy here: India’s Draft Ecommerce Policy is really a Digital Economy Policy, impacts the whole ecosystem.
Our coverage of the #NAMApolicy on the draft National E-commerce Policy:
- #NAMApolicy on the E-Commerce Policy: should network effects be regulated?
- #NAMApolicy: Effects of the E-Commerce Policy on Data Protection and Data Localisation