ED shifts focus to Amazon and Flipkart ties with preferred sellers

The Enforcement Directorate (ED) is intensifying its probe into whether Amazon and Flipkart violated foreign direct investment (FDI) regulations by exerting control over vendors on their platforms, reported The Economic Times citing sources. The investigation, which initially focused on sellers, is now scrutinising the e-commerce giants’ relationships with their vendors.  

 

Under India’s FDI rules, e-commerce platforms are prohibited from exercising control over vendors and are required to operate solely as neutral intermediaries.  

 

Focus on Fema violations

 

The ED is examining potential violations under the Foreign Exchange Management Act (Fema), which involves civil offences and monetary penalties. Earlier this month, the agency conducted extensive searches across 19 locations linked to large sellers on Amazon and Flipkart in cities including New Delhi, Bengaluru, and Hyderabad.  

 

“The sellers covered during the searches were summoned and questioned to explain certain transactions and arrangements. Documents are being thoroughly analysed,” said an official familiar with the probe. 

 

“The main objective is to determine whether Amazon and Flipkart effectively controlled preferred sellers, disguising them as independent vendors, and thereby breached FDI norms,” he said.

 

The next phase of the investigation will focus on the e-commerce companies themselves. “Once all documents from the searches are reviewed and individuals involved are interrogated, key managerial personnel handling FDI operations will be called in for questioning,” the official added.  

 

New evidence prompts fresh searches

 

While the issue has been under investigation for several years, fresh searches were conducted after new actionable material came to light. “The matter dates back to 2019, and both companies have previously been asked to join the probe and present their stand,” said another source.  

 

Sources said the ED is particularly interested in whether the platforms influenced pricing or if sellers breached the 25 per cent sales limit. “The ED has gathered sufficient material to seek explanations from the companies,” the source said.  

 

Executives from both companies have denied any wrongdoing. “FDI norms are stringent, and with most transactions having a digital trail, it is nearly impossible to violate them,” an executive told The Economic Times.  

 

Compliance under scrutiny   

India’s FDI rules bar e-commerce companies with foreign investment from running an inventory-based model. In 2018, the government further tightened these norms, prohibiting platforms from holding stakes in sellers or influencing their operations. Additionally, no single seller can contribute more than 25 per cent of a platform’s total sales.  

 

Since the implementation of these rules, Amazon and Flipkart have made significant changes, including shutting down or divesting stakes in major sellers. For instance, earlier this year, Amazon’s Clicktech acquired Appario Retail, its largest seller after Cloudtail’s closure, as part of the company’s compliance efforts.  

 

Parallel CCI investigations   

The alleged preference for a few large sellers by these platforms has also been investigated by the Competition Commission of India (CCI). However, sources clarified that the ED’s probe is separate and is based on complaints related to violations of foreign investment norms.  

 

Both Amazon and Flipkart have been summoned in the past by various authorities, including the CCI and ED, to address similar concerns. “The companies have consistently explained their stand methodically and meticulously,” an industry executive mentioned.