The aim is to find out if the ecommerce companies were exercising control over vendors. Under the rules, they can only act as platforms.
ED is investigating alleged violations under the Foreign Exchange Management Act (Fema) that are ordinarily civil offences entailing monetary penalties. Earlier this month, the agency conducted nationwide searches at 19 sites related to large sellers on Amazon and Flipkart in New Delhi, Bengaluru and Hyderabad.
“The sellers covered during the searches were summoned and have been questioned to explain certain transactions and arrangements. Documents are being studied thoroughly,” said an official with knowledge of the matter. “The main focus is to ascertain whether Amazon and Flipkart operated through a preferred set of sellers, which were invariably controlled by them but disguised as independent vendors, thus violating FDI norms.”
“Once all search-related documents are studied and people linked to them are questioned, key managerial personnel—who handle FDI of the company—will be asked to join the probe,” said the official cited above.
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Actionable material
While the sellers were covered in the first leg, the next one will be concentrated on the ecommerce giants, those in the know said. The issue dates from 2019, said a person linked to one of the companies.
Amazon India and Flipkart did not respond to ET’s queries. The central probe agency hasn’t summoned them.
The issue has been under investigation for the past few years, said the people cited. However, fresh searches were conducted earlier this month after the agency found certain actionable material, according to them.
“The issue has been active and, in the past, the companies were asked to join the investigation (and) they had explained their stand,” another person familiar with the probe told ET. “However, there was fresh material, which led to the recent searches.”
ED wants to discover whether the platforms played a role in influencing prices and if the sellers breached the 25% sales limit. “ED has collected enough material to ask the companies to explain their side,” one of the persons said.
Executives denied any wrongdoing and repeated to ET that they had explained their stand to the authorities before. “FDI norms are very stringent and now, with most of the transactions having a digital footprint, it is impossible to violate them,” said one of them.
Any violation will bring scrutiny by multiple law enforcement agencies, something that companies are averse to, given the reputational risk, said another person, adding that the Reserve Bank of India (RBI) is the FDI gatekeeper, so the scrutiny is rigorous.
“Both companies were summoned in the past,” said the executive. “The same set of queries (have been) made by CCI (the Competition Commission of India) and ED, and the companies have explained their stand methodically and meticulously.”
India’s FDI rules prohibit ecommerce companies with foreign investment from operating on an inventory-based model. In December 2018, the Centre notified a new set of rules for ecommerce companies, disallowing them from directly or indirectly holding any stake in sellers or having any sway over them. The rules also mandated that no one seller should contribute to more than 25% of the sales of a single platform. Following the tightening of the norms, the two companies have either shut or divested stakes in major sellers listed on their platforms.
ET reported in April that Clicktech, a major seller on Amazon India, was acquiring peer Appario Retail as a part of the ecommerce firm’s plan to divest stakes in sellers on its platform. Appario, the largest seller on Amazon India following the closure of Cloudtail, moved a significant volume of orders for the local arm of the US-based etailer. The sale of the stake to Clicktech was the second time Amazon divested its stake from a seller to comply with India’s ecommerce norms.
Separately, the marketplaces’ alleged preferences for a small number of large sellers has also been investigated by CCI to ascertain whether they have been providing a level-playing field to all. “The ED probe, however, is different from the CCI action,” said one of the people cited. “It is based on complaints received by ED over alleged violations of foreign investment rules.”
