Why Amazon, Flipkart Have Run into Trouble with the Enforcement Directorate 

The Enforcement Directorate (ED) on November 7 raided e-commerce giants Amazon and Flipkart for alleged non-compliance with the Foreign Exchange Management Act (FEMA) and Foreign Direct Investment (FDI). 

The raids are being conducted on sellers of the two companies in New Delhi, Mumbai and Bengaluru. This was first reported by Reuters. Overall, the raid is being conducted in 19 locations. 

The raid is being conducted by the agency to understand how Amazon and Flipkart are indirectly influencing the selling price of goods and violating the FDI rules of the country. 

This comes at a time when the Competition Commission of India (CCI) recently found out that the two platforms gave preference to select sellers in the country.

The CCI released a 1,027-page report on Amazon and a 1,696-page report on Flipkart on August 9. The report highlighted that the two companies preferred certain sellers who appeared higher in the search results. “Each of the anti-competitive practices alleged... were investigated and found to be true,” said the report that was seen by Reuters. 

Previous ED Raids on Amazon and Flipkart

Now, coming back to the raids, it should be noted that this is not the first time that Amazon and Flipkart are under the radar of the ED. Time and again, there have been reports that highlight that Amazon and Flipkart have flouted the FDI laws in the country. 

In 2020, the Confederation of All India Traders (CAIT) wrote to the Department for Promotion of Industry and Internal Trade (DPIIT) to take action against the two e-commerce giants for flouting the FEMA and FDI laws. 

The association at that time highlighted that Flipkart and Amazon have been controlling the inventories of the goods and services that are being sold on its marketplace, in violation of the law. 

Additionally, in 2021, a show cause notice of 10,600 crore was issued to Flipkart by the CCI for its alleged violation of the FEMA Act. As per reports, the notice was sent as Flipkart was selling goods through a related party, WS Retail. Further, there were allegations that the firm attracted foreign investments. 

To add to it, a Reuters investigation in 2021 found out that Amazon gave preferential treatment to select sellers. This included giving them exclusive deals and also providing significant control over their inventories. 

Need for Strict Adherence to FDI, Competition Laws

Let's first understand what the law is. “The FDI laws recognize two types of models for e-commerce, one which is the marketplace model and the other is the inventory-based model,” said Kinjal Champaneria, Partner, Solomon & Co. 

A marketplace model of e-commerce is allowed to have a FDI of up to 100 percent. However, the same is not permitted in an inventory-based model. Experts say the main accusation against Amazon and Flipkart is that, while they claim to operate as a marketplace, they are actually running an inventory-based model indirectly. 

The laws also state that e-commerce platforms must ensure fair competition and should not directly or indirectly control the prices of goods and services on their platform. 

“Sellers having equity participation or having control over their inventory by the e-commerce marketplace entity or its group companies are also not permitted to be sellers on the e-commerce platform operated by such a marketplace entity,” said Vaibhav Kakkar, Senior Partner at Saraf and Partners.

Read: CAIT vs Amazon, Flipkart: Trade Body's Grey Marketing Accusation Increases Pressure on E-Commerce Giants

If found guilty, experts indicate that Amazon and Flipkart could face financial penalties depending on the amounts involved in the foreign transactions. Additionally, Amazon and Flipkart could face financial penalties depending on the amounts involved in the foreign transactions. “Should the Enforcement Directorate be satisfied, criminal proceedings may then be initiated against the guilty parties,” added Champaneria. 

To clarify, the primary crux is that the FDI policy signifies that these platforms can engage only in business-to-business (B2B) e-commerce and not in business-to-consumer (B2C) business. Additionally, the law clearly states that “e-commerce marketplace entities will not mandate any seller to sell any product exclusively on their platform only.” 

Now the question that comes is: how significant is the raid for the e-commerce platforms and the ecosystem as a  whole? “This investigation is significant as it highlights India’s heightened regulatory scrutiny on foreign-backed e-commerce platforms, reinforcing the need for transparency and adherence to FDI policies,” said Ketan Mukhija, Senior Partner, Burgeon Law. 

Given the size and influence of these platforms, a stricter regulatory stance could impact the future of e-commerce operations in India, encouraging more alignment with domestic business interests, added Mukhija. This is happening at a time when the Competition Commission of India (CCI) found out in its report that both Zomato and Flipkart breached anti-trust laws.

The document by the CCI that was seen by Reuters found out that the two companies preferred select sellers in their platform. It said that Zomato entered into exclusive contracts with certain sellers. Swiggy, on the other hand, promised business growth to users in return for exclusive  arrangements. Amid the ongoing situation, it will be interesting to see how the situation unfolds as the need for strict adherence to FDI and competition laws increases.