Flipkart and Bharti Walmart have been accused of violating Indian foreign direct investment norms in the past. The Indian Government has even referred the cases of these two companies to Enforcement Directorate (ED) for ascertaining the alleged violation of FDI regulations of India.
There is a growing concern among Indian Government to check the legality of e-commerce businesses operating by bypassing FDI regulations. Many media reports have claimed that Flipkart is under the scanner for allegedly flouting FDI rules which allow e-commerce companies with foreign investment to carry out only business-to-business (B2B) transactions but not business to consumer (B2C) transactions by creating complex structures that may not be permissible.
The business structuring of e-commerce in India is not an easy task. The stakeholders have to comply with techno legal requirements in order to successfully run e-commerce businesses in India. As on date e-commerce due diligence in India is neglected by investors and financial institutions.
As per the Consolidated FDI Policy of India 2013 by Department of Industrial Policy and Promotion (DIPP) (PDF), the foreign direct investment (FDI) in e-commerce activities in India is allowed upto 100% through automatic route. E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.
As per the present FDI policy, FDI in Single Brand product retail trading is allowed upto 100% through government approval route and is allowed upto 51% in multi brand retail trading through government approval. This is subject to compliance with additional requirements as prescribed by the policy. The Commerce and Industry Ministry of India is in favour 100 Per Cent FDI in B2C E-Commerce sector but that may take some time. Till then FDI norms must be strictly adhered to by e-commerce stakeholders of India.
However, this is not happening in India and most of the e-commerce players of India are openly violating many laws of India including the FDI rules and regulations. In one such case, the ED is likely to send a show-cause notice to Flipkart for alleged violation of foreign investment rules for an amount of Rs 1,400 crore.
In late 2012, the commerce and industry ministry had told the Lok Sabha that Flipkart Online Services, India’s leading e-commerce company, was under ED’s scanner for possible violation of foreign investment rules. Now, the agency has prima facie evidence that the company has flouted the country’s FDI rules, a finance ministry official said.
The ED probe is for the period before April 2013, when Flipkart shifted to the marketplace model, converting itself into a platform for independent buyers and sellers to conduct business on its site. It junked its earlier model where it had control over goods sold through its e-commerce site which is not allowed under the current FDI norm. Foreign private equity investors, including Accel Partners, Tiger Global, Iconiq Capital and Naspers Group, have invested in Flipkart Online Services.