India’s authorities are probing allegations of foreign exchange rule violations by some of the country’s poster-boy online retail companies, most of which have attracted eye-popping valuations driven by an e-commerce boom.
The Enforcement Directorate (ED), an agency that tracks overseas money flows, has turned the focus on eight such firms for suspected flouting of the Foreign Exchange Management Act (FEMA), an umbrella law that regulates money transfers from abroad.
These eight firms are among the 21 online retail portals, primarily dealing with hawking products to customers, which the ED was looking into on orders of the Delhi high court.
The ED is now looking at their books of accounts with a fine-tooth comb to determine whether these eight companies violated foreign direct investment (FDI) rules by selling products of multiple brands through their portals.
The agency is probing charges that some of these companies may have actually stocked up goods through outright purchases from manufacturers and eventually sold these at deep discounts to customers directly. The agency will mention the eight firms in its report to be submitted as an affidavit to the court in the next hearing in February.
Indian rules allow FDI in e-commerce only for those companies that manufacture and sell their own products. FDI is prohibited in other e-retail companies that do not manufacture goods. To get around this, most online retail portals have structured themselves as aggregators that act as marketplaces for people to choose and buy products of companies that put up goods for sale through these gateways.
India’s online retail industry is currently valued at nearly $20 billion (about Rs 1,36,000 crore). These firms, which sell products from cow dung cakes to hi-tech gadgets, have attracted large sums of investment from foreign venture and private equity funds driven by the country’s fast-expanding mobile and internet universe.
The 21 firms under the ED scanner include India’s largest private e-commerce company Flipkart, and its peers including Snapdeal, Jabong and Amazon’s Junglee, among others. The companies declined to comment for this story. “We decline to comment” a Flipkart spokesperson said in an emailed response to Hindustan Times.
“We wouldn’t like to comment on this,” a Snapdeal spokesperson said, while the spokesperson of Amazon India told HT on a phone call that the company “wouldn’t be able to make any comment now”. Jabong did not respond to HT’s mail.
In November, the Delhi high court asked the ED to probe 21 e-commerce sites to verify if they were flouting FEMA rules.
The direction came after the All India Footwear Manufacturers and Retailers Association (AIFMRA) — an apex body of local shoe makers and retailers — petitioned the court alleging that many online portals were actually carrying out direct multi-brand retail trade and also received large funds from foreign investors.
“There are several pointers that show such online sites indulge in multi-brand retail: their business models are based on the working of a typical shopping mall conducting multi-brand purchase and sale,” a source, who did not wish to be identified, told HT.
“There is clearly no difference at all between a physical retailer having a shop and an e-commerce site, since they are both retailers offering the same services to a customer. But the e-commerce site gains an unfair, perverse advantage over the physical retailer by doing multi-brand retail despite having FDI funds,” Rishi Agrawala, AIMFRA’s lawyer, told HT.