If reports are to be believed, its going to be tough time ahead for number of ecommerce players in the country, as after Flipkart and Myntra, the Enforcement Directorate has begun probe against a dozen popular online retailers for alleged violations of foreign direct investment rules in their ecommerce operations.
Reports suggests that the ED has received communication from the Reserve Bank of India regarding a few ecommerce firms while it has took up the rest cases suo-moto for probe under the provisions of the Foreign Exchange Management Act (FEMA).
Now a team of officials is investigating the business operations of ecommerce companies that have thronged the online retail marketplace in the last few years. The team has gathered documents about the business incorporations, shareholders and business market models of these ecommerce firms, which include big capital and small online retail firms which are based in major metropolis of the country.
The probe period for investigating the FDI contributions of these firms under the scanner is before April 2013.
“FDI is banned in multi-brand retail and the same applies to ecommerce also,” commerce and industry minister Nirmala Sitharaman, had said recently. Many ecommerce firms in India have structured their business in such a way that foreign capital coming to their wholesale business indirectly supports the retail ecommerce business.
This simply suggests that the ecommerce firms that operate in the B2C space but whose affiliates in the B2B space have foreign direct investment are likely to be in trouble.
As per the policy, there is 100% FDI in B2B ecommerce activities but not in B2C. However, several foreign firms are present in the country through the marketplace model, where they do not retail any products but offers a platform for consumers to place orders, which are then retailed by domestic retailers, which is legal. But there are few B2C ecommerce players that also operate through the marketplace model but use their other FDI funded ventures in the B2B space for retail sales, which are now likely to be in trouble.
Under FEMA rules, a firm or entity found in contravention of the law can be penalised with a penalty three times of the detected violation.
Recently, there were reports that ED is likely to send a show-cause notice to Flipkart alleging violation of INR 1,400 Cr. Myntra was also caught under the Enforcement Directorate’s scanner for possible violation of foreign direct investment (FDI) norms. Though investigations are still in initial stage.
The probe is expected to be done in a “reasonable time period” and in few cases the ED might issue final show cause notices soon.