Amazon and Flipkart face the music as Indian government asks both RBI and ED to take action against allegations of FDI violations; Govt to incorporate Probe Body, Data Audits under E-commerce policy

The Indian government has taken strong cognizance of the allegations made against Amazon and Walmart owned Flipkart made by key trader’s body in relation to violations of foreign direct investments (FDI) and other pertinent rules.

This, after numerous complaints, was made by the Confederation of All India Traders (CAIT) against the two e-commerce giants for violations of FDI Policy and Foreign Exchange Management Act, 1999 (FEMA).

In response to these allegations, the Union Government has directed both the Enforcement Directorate (ED) and the Reserve Bank of India to take all essential steps against the alleged violations committed by Amazon and Flipkart.

In its letter issued in December, the Department of Promotion of Industries and Internal Trade (DPI) of the Ministry of Commerce has asked both the Enforcement Directorate and Reserve Bank of India to take necessary action against Amazon and Flipkart basis several complaints made by CAIT.

The e-commerce giants are found to be in violation of FEMA rules/ FDI policy by having adopted illegal structuring/ investments and practices, according to the letter to the RBI nad the ED written by Mira Sethi, deputy director with the department for the promotion of industry and internal trade (DPI).

The CAIT has strongly objected to the recent Rs 1500 crore deal between Flipkart and Aditya Birla Group and stated four complaints including violation of FDI policy, breach of FDI policy related to FDI in manufacturing which is being used for Multi Brand Retailing by various e-commerce companies, violation of FEMA rules and violation of FEMA and FDI policy by both Amazon and Flipkart and manipulating the loopholes.

CAIT has alleged that the deal between Flipkart and Aditya Birla Fashion & Retail flouts the FDI policy since Flipkart Group operates e-commerce platforms such as Myntra and Flipkart have a clear intention to make ABFRL a “preferred seller” on their marketplace platforms.

The CAIT also stated that according to the FDI policy, it prohibits a foreign company from venturing in any form of multi-brand retail trading (MBRT) by having an equity interest in the sellers on its marketplace platform. It prohibits controlling either directly or indirectly, the inventory through side agreements or even under the garb of B2B e-commerce.

In the present, Aditya Birla Fashion & Retail had recently announced that Flipkart Group would be picking up a 7.8% stake in it.

Amazon and Flipkart have also been implicated in misusing the FDI policy in manufacturing by e-commerce businesses for multi-brand retailing in the Grocery segment. It has alleged that the two e-commerce giants have exploited and found loopholes in rules and have extensively violated the FDI policies concerning e-commerce by offering discounts through sellers on their platforms.

Currently, the DPIIT formulates and notifies FDI policies; however, any violation of the rules is under the parameter and dealt with under the FEMA’s penal provisions ( Foreign Exchange Management Act), which is administered by the RBI and enforced by the ED.

Following the complaints, the head of research at Pahle India Foundation, Nirupama Soundararajan, has said, “the directive is self-explanatory in that the DPIIT has requested that the authorities concerned examine the matter at hand to assess if any violations have indeed happened. And if any violations are found to have occurred, then formal investigations can ensue, and if not, then the matter should be laid to rest”.

Meanwhile, both Amazon and Flipkart have denied any such violations and have stated that all operations comply with the present rules and regulations.

The e-commerce giants have maintained that no formal notification from the industry ministry, RBI, or the ED has been received by the companies yet.

A Flipkart spokesperson has commenting on the allegations, affirmed, “The Flipkart group is fully compliant with all applicable laws and FDI regulations in the country…Through our pan-India operations and deep investments in supply chain, physical & digital infrastructure, we create lakhs of direct and indirect employment opportunities and nurture entrepreneurs across the country.”

Govt to incorporate Probe Body, Data Audits under E-commerce policy.

It has been stated that the government is considering to set up an investigative body to keep a check on e-commerce business entities and to initiate necessary actions in case of any violations.

This investigative body will come into action in case the DPIIT draft e-commerce policy is adopted.

Under the draft policy, it proposes ensuring safeguards that may include restricting the cross-border flow of data belonging to Indian customers and transactions taking place in the country; these also include adequate audits carried out by Indian firms of these entities’ storage locations.

The e-commerce operators under the draft policy must also ensure that algorithms used by the companies should not be biased towards any particular seller or vendor.

They also will have to ensure that goods and services delivered to the customers match the descriptions as cited on the platform and quality products and services are provided to the customers.

It also states that while the government may not offer incentives to attract foreign investments in the e-commerce space, it will, however, reward small retailers that list their products and services on platforms like Amazon and Flipkart.

The e-commerce policies will also independently hold guidelines even though the IT ministry is working on data localization and non – personal data regulations under the Personal Data Protection Bill 2019.

The trader bodies have been questioning the Amazons, and Flipkart’s business policies and tactics, i.e., deep discounting of products, preferential treatments to some traders, and many other tactics; the draft policy will also look into these e-commerce giants which have been accused of indulging in predatory practices to support their business and has resulted into eating into the business of small-time retailers.

The CAIT has also accused Amazon and Flipkart of deriving the government of goods and service tax (GST)