On Monday (March 18th), The Delhi High Court disposed off a public interest litigation (PIL) which has sought probe into the alleged foriegn direct investment (FDI) violations by the ecommerce giants Flipkart and Amazon. This PIL was filed by a non-government organisation (NGO) Telecom Watchdog.
A two judge bench of Chief Justice Rajendra Menon and Justice V Kameswar Rao passed the order after Enforcement Directorate (ED) informed the court about its already pending investigation on this issue. ED is a law enforcement and economic intelligence agency under the Ministry of Finance. The agency is responsible for enforcing economic laws and fighting economic crime in India.
As per the court affidavit, the ED has registered a complaint and initiated a probe into the violation of Foreign Exchange Management Act (FEMA), 1999 or any other legislation by Amazon and Flipkart.
The NGO Telecom Watchdog petition had sought legal proceedings against Amazon and Flipkart under the FEMA for violation of existing FDI norms.
A per a March 2016 press note, foreign direct investment upto 100% under the automatic route is permitted under business to business (B2B) ecommerce, but not in business to consumer (B2C) model. Further, an ecommerce entity is not permitted to more than 25% of sales affected through its marketplace from one vendor or their group companies.
The petition alleged that in order to circumvent this press note, Amazon and Flipkart created “name lending” companies and “controlled sellers” to sell expensive stocks at cheap rates. Further, it was alleged that ecommerce platforms have taken up the small retailers space by becoming proxy sellers with the help of their name lender and controlled sellers.
Particularly in the case of Amazon, this rerouting was allegedly done through a company named Prione Business Services Pvt Ltd. which holds 100% equity in Cloudtail India Pvt Ltd, the largest seller on Amazon.
And for Flipkart, it was alleged that the company searched for some name lenders willing to form companies, and then through these entities, the goods invoicing was routed.
Both Flipkart and Amazon were alleged of creating several such group companies in the chain to aid the diversification of discounts and losses.
The petition stated, “Exchange offers, EMI costs and bank offers are funded completely or substantially by Amazon & Flipkart and constitute a clear influence on price in violation of FDI norms.”
With the new ecommerce FDI rules applied from February 1, Amazon and Walmart have together lost $50 Bn in market capitalisation. Amazon experienced a fall in its shares by 5.38% at the start of February losing $45.22 Bn in market capitalisation.
A recent Deloitte India and Retailers Association of India (RAI) report have predicted ecommerce market to grow to $1.2 Tn by 2021. With the Indian government working towards finalising the ecommerce guidelines, the segment is expected to get further organised in favour of the local players. It will be interesting to see how the two biggest players in the Indian ecommerce industry fair in this environment.