Flipkart is in full compliance with India’s foreign investment rules and is ready to face any audit under the law, the company’s CEO Kalyan Krishnamurthy said on July 2, according to an Economic Times report. Krishnamurthy made the assertion three weeks after top executives of Indian and foreign e-commerce companies, including Flipkart and Amazon, met Commerce and Industry Minister Piyush Goyal, who reportedly asked Flipkart if it was compliant with the latest foreign direct investment (FDI) norms for online marketplaces. At this meeting, e-commerce companies were also asked to submit details of their shareholding, subsidiaries and business structures, among others, the ET report said, citing unnamed sources. Krishnamurthy did not comment on the meeting but said his company was committed to complying with all policies and laws, and that it was open to any audit to check for compliance with requirements in Press Note 2.
Did Flipkart circumvent new FDI norms through intermediaries?
Issued in December 2018, Press Note 2 made amendments to the rules related to FDI and inventory in e-commerce companies. Under the new rules, which came into effect in February 2019, FDI-funded marketplaces are barred from exercising control or ownership over the inventory of vendors on their platforms. The rules also said that a seller on any e-commerce platform would be considered ‘controlled’ if it sourced more than 25% of its merchandise from any entity related to the e-commerce platform.
Before the new norms, a group of preferred sellers on Flipkart accounted for nearly 75% of all merchandise sold on the platform, the ET report said. They would source virtually their entire stock from Flipkart’s wholesale unit and then sell these goods to consumers. But right before the new rules kicked in from February, Flipkart created a layer of B2B entities to act as intermediaries between its wholesale arm and many prominent sellers on its platform to ensure that it was complaint with the new rules. These intermediaries bought goods from Flipkart’s wholesale arm and sold these to the preferred sellers. This, a source told ET, caught the eye of the ministry, and seems to be the reason why Goyal asked e-commerce companies to follow the FDI rules “in both letter and spirit” while warning them to refrain from offering deep discounts. MediaNama has reached out to Flipkart for comment and will update this once they reply.
Other changes to FDI rules for e-commerce platforms and vendors
Here are the other changes to FDI and inventory rules for e-commerce platforms and vendors that came into effect in February:
- If a marketplace has an equity stake in a vendor/seller, or if it controls its inventory, the vendor is not permitted to sell its products on the marketplace.
- Warranty and guarantee of goods and services sold on marketplaces is the responsibility of the seller/vendor, and not the platform.
- The marketplace cannot influence prices directly or indirectly and has to offer a level-playing field all vendors/players — those controlled by marketplaces, or other vendors. Platforms will provide the same services of cashbacks, fulfillment, logistics, warehousing, advertisements, marketing, payments, finance, etc. across all vendors.
- Marketplaces cannot mandate any seller to sell any product exclusively on its platform.