Are e-commerce giants violating FDI norms?

As policymakers consider future regulatory steps, the ongoing ED investigation may serve as a pivotal moment in clarifying the regulatory framework for e-commerce operations in India

Reportedly, on October 7, 2024, the Enforcement Directorate (ED) raided the offices of half a dozen sellers operating on the e-commerce platforms of Amazon and Walmart-owned Flipkart for alleged violations of Foreign Investment norms and Prevention of Money Laundering Act (PMLA). The intent behind the searches was to gather evidence on complaints that these sellers have been importing products from China but routing them through other locations to avoid paying higher import duties and longer time in getting the consignment cleared at the ports (that would be the case if the products were imported directly from China involving higher import tariff and more security-related checks).

The agency also wanted to verify if the firms had indulged in ‘under-invoicing’, a practice that involves understatement of the true value of goods to save on payment of import duty. Establishing such violations will be less of a headache for the enforcement authorities although proving them in the court will remain a challenge apart from the process being long drawn. However, the big headache relates to proving violations of the norms relating to foreign direct investment (FDI). E-commerce, put simply, is the practice of buying and selling goods or services using the Internet. Amazon and Flipkart essentially operate the “market-place” model of e-commerce – a special dispensation carved out by the Narendra Modi Government under which 100 per cent FDI is permitted.

The Department for Promotion of Industry and Internal Trade or DPIIT in the Ministry of Commerce and Industries issued a Press Note (PN) in 2016 detailing the guidelines in this regard. The “market-place” is a platform where vendors sell their products to consumers even as its owner (say, Amazon) merely acts as a facilitator. The marketplace owner books orders, raises invoices, arranges deliveries, accepts payments, handles rejections, warehousing and so on. But, he can’t own and control the inventory of goods and undertake “direct selling” to the consumer. But, this is happening.

The charge has been levelled by none other than the Union Commerce and Industry Minister Piyush Goyal. At the launch of the Pahle India Foundation’s report ‘Net Impact of E-Commerce on Employment and Consumer Welfare in India’ on August 21, 2024, Goyal took a shot at Amazon, for selling products directly to consumers and indulging in “predatory pricing”.  That could lead to massive growth of e-commerce capturing half of the Indian retail market ten years from now. This would adversely impact an estimated 100 million small retailers across the country. Predatory pricing involves setting prices for a product at an unrealistically low level to undercut the competition and gain market share.

Generally practised by a new player, predatory pricing violates antitrust laws even as it seeks to create a monopoly. Goyal opines that Amazon is selling products on its e-commerce platform at unrealistically low prices which results in heavy losses estimated to be about a billion dollars annually. To fund these losses, it brings the money from its parent but camouflages it as FDI. Pertinently, he levelled these charges in 2020 also.  

Apart from the top brass in the political establishment being fully seized of the matter, it has engaged the attention of the judiciary up to the level of the country’s top court. In 2019, Delhi Vyapar Mahasangh (DVM) complained to the Competition Commission of India (CCI) alleging anti-competitive behaviour by Amazon Seller Services (ASS) and Flipkart Internet Private Limited (FIPL).

It argued that ASS and FIPL had entered into exclusive sales agreements with smartphone makers to sell certain phones through a small number of preferred sellers and offering to pay for part of the discount that such sellers would offer during key sales periods such as Flipkart’s big billion day and Amazon’s Prime Day.

Prima facie, the CCI agreed with DVM’s contention and ordered a probe by the Director General (DG) – Investigation. ASS and FIPL went up to the Supreme Court (SC) to get the order quashed. In August 2021, dismissing their appeal, the SC ordered “the CCI – DG will complete the probe. In its recent findings, the CCI-DG has charged ASS and FIPL with indulging in ‘predatory pricing’ and violation of antitrust laws. Has Amazon/Flipkart violated FDI norms also?

To answer this let us look at the fine print. While allowing 100 per cent FDI in a market-place model of e-commerce, the PN (2016) had prescribed two main riders viz., (i) the entity can’t permit more than 25 per cent of total sales on its platform from one vendor or its group companies”. (ii) it can’t directly or indirectly influence the sale price. The first condition didn’t specify that a firm connected with the owner of “market-place” (say its subsidiary or its joint venture or JV with an Indian company) couldn’t be a vendor.  

Thus, contrary to the real intent of the policy which disallowed the e-commerce platform owners from direct selling to individual consumers, the fine print permitted them to do so. Putting a cap of 25 per cent on each such entity led to a bizarre scenario whereby four JVs or subsidiaries of Amazon could control all of the sales on its platform.

And, having permitted it as a direct seller, you can’t prevent him from deciding/influencing the price. Thus, the second condition becomes redundant.        

Meanwhile, the extant policy permits FDI in business-to-business or B2B segments in physical/offline format. This has enabled Amazon and Flipkart to set up offline stores. From these stores, they sell products to sellers (many of such entities are the darlings of the duo or JVs set up in collaboration with them), who in turn, sell those products on their marketplace platform.

So, it was a well-crafted policy framework intended to enable e-commerce majors to do all that is necessary to control inventory and undertake direct selling to consumers on their own marketplace platform. Meanwhile, in a note issued on December 26, 2018, the DPIIT clarified that “the owner of the marketplace or its subsidiary or its JV with Indian company can’t have ownership of the seller.” Further, “a seller on the platform can’t source more than 25 per cent of its inventory from a firm connected with the latter. The above clarification has prompted e-commerce majors to rework strategies in a manner such that their links with the ‘preferred’ sellers are not clearly visible.

Meanwhile, the enforcement agencies are in full action mode raiding the latter’s premises, looking at the documents with the intent to identify and expose such links. But, this won’t lead them anywhere. The government should face the facts head-on.

If, its original intent was to ensure that the marketplace can’t have any connection whatsoever with the seller whether by way of ownership or sourcing of the latter’s inventory, that should have been mentioned in the guidelines issued in 2016.

Anything done subsequently even if it comes by way of a clarification will be considered a retrospective change of policy and send a wrong signal.  

Instead of going back, the government should clearly say ‘100 per cent FDI is permitted in direct selling to consumers alongside running a marketplace model’. It should also allow 100 per cent FDI in retail in all forms, single-brand or multi-brand retail (MBR), online or offline sans any riders. All these distinctions should go. This will enable millions of Indian retailers to have ‘unrestrained’ access to foreign capital thereby ensuring a level playing field.

(The writer is a policy analyst; views are personal)