E-tail giants up against a brick-and-mortar wall

From accusations of circumventing domestic laws to grappling with a changing policy landscape, doing business in India hasn't been an easy ride

The year 2021 has been nothing short of a roller-coaster ride for the world’s largest online retailer, Amazon, even as it kick-started its annual Great Indian Festival Sale 2021 on Sunday.

Doing business in India hasn’t been easy for global e-commerce giants, such as Amazon and Walmart-backed Flipkart. From being embroiled in legal battles and dealing with accusations of circumventing domestic laws from offline traders to grappling with a changing policy landscape, these companies continue to stare at a plethora of challenges that lie ahead.

Last month, Amazon initiated an investigation into the conduct of its legal representatives in India, according to a report by media platform The Morning Context. The report said this investigation comes on the back of a whistle-blower complaint, alleging certain monies paid by Amazon in legal fees have been funnelled into bribes by one or more of its legal representatives.

Thereafter, Amazon said it has zero tolerance for bribery and will investigate all allegations of corruption fully, responding to a report by a media platform that alleged that the US-based e-commerce giant has begun an internal investigation into claims of graft.

While the government has not officially commented on the matter, Commerce and Industry Minister Piyush Goyal has, on several occasions, pointed out that the foreign direct investment (FDI) policy is not being followed in letter and spirit by global electronic retailers (e-tailers). Cash-rich e-commerce companies also pose a risk to the livelihoods of millions of small retail stores in India, he had said.

Amazon, along with Flipkart, is also subject of an ongoing antitrust investigation in India. Besides, a Reuters report in February this year, citing internal documents, suggested that Amazon had circumvented local laws on FDI in e-commerce and has been giving preferential treatment to a small group of sellers on its India platform.

Foreign investment laws in India restrict investment in retail trade. Unlike the inventory-based or business-to-consumer model that is followed in developed nations such as the US and European countries, experts said e-commerce companies have been operating as a marketplace in India and have for long argued that they are not directly involved in retail trade.

“However, the government agencies have repeatedly alleged and investigated e-commerce companies with substantial foreign equity for non-compliance and violations of indirect tax laws, FDI laws, among others,” said Rahul Goel, partner, AnantLaw.

“Also, with increased market presence and market share, the allegations relating to anti-competitive practices and discrimination have also come to light. The scrutiny of e-commerce companies and digital platforms by regulators is a global phenomenon,” added Goel.

Mathew Chacko, partner at law firm Spice Route Legal, said e-commerce companies have, generally, been innovative in their regulatory structuring (perhaps, their hand forced by an inflexible law).

“This seems to be catching up with them. Perhaps, this is a good time for all e-commerce companies to re-evaluate their compliance protocols, especially since the country’s regulators are looking closely at the sector,” said Chacko.

Amazon has, so far, committed over $6.5 billion to the India market and Amazon's new Chief Executive Officer Andrew R Jassy has pledged to do more. The firm, which employs over 100,000 professionals across the country, has made a pledge to digitise 10 million small businesses, enable 10 billion in exports, and create 2 million jobs in India by 2025.

With the country’s online market projected to soar to $1 trillion by 2025, Amazon is in a fierce battle with Flipkart, Reliance's JioMart, and Tata Group, which are also betting big on e-commerce.

According to a Grant Thornton report, e-commerce channels are becoming the preferred mode of shopping, surpassing brick-and-mortar and kirana stores.

Global e-tailers vs domestic traders

A few trade bodies perceive Amazon and Flipkart as threats to local retailers and have alleged preferential treatment to select sellers.

The Confederation of All India Traders (CAIT), which represents 70 million traders and considered the core vote bank of the National Democratic Alliance-led government, has demanded a Central Bureau of Investigation inquiry related to the report about the conduct of its legal representatives in India that the online retailer is looking into after allegations of corruption come to light. CAIT has sent a communication related to this to Goyal.

CAIT Secretary-General Praveen Khandelwal said these foreign companies have been flouting domestic laws and yet no action has been taken against them. “The trading community provides employment to 400 million, yet there is absence of proper policy implementation. A complex tax system, unavailability of credit through formal channels, and the invasion into trade by foreign companies are key challenges,” said Khandelwal.

Sajai Singh, partner at law firm J Sagar Associates, said the focus of a proposed set of e-commerce rules is to enforce FDI norms and establish parameters, so that domestic products and vendors are not discriminated against.

“While the provisions apply to all e-commerce platforms, reading the FDI rules alongside does require a higher level of compliance, and, therefore, scrutiny for foreign players,” added Singh.