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Commerce Minister Nirmala Sitharaman may have put a spanner in the works as far as FDI in e-commerce is concerned.
The Financial Express
reported on Friday that the minister had said that where Foreign Direct Investment was concerned, the same rules as multi-brand retail would apply to e-commerce. FDI is banned in multi-brand retail and the same applies to e-commerce also, she said at an indian express group idea exchange forum. the bjp-led government has made it clear that is opposed any fdi in multi-brand retail. sitharaman statement comes a time when enforcement directorate (ed) closely scanning capital structures of various companies operating e-commerce space. few days back, ed had found online retail firm flipkart violation foreign management act (fema) provisions. also investigation other sites for similar violations. problem thin line between operations b2b (wholesale) company and b2c (retail) company. currently, india permits 100% activities but not companies. players latter space have adopted marketplace model, wherein they take order which are filled by domestic retailers. arises operates through model uses their fdi-funded ventures sales. minister reiteration policy would mean such now to discontinue practice. being probed alleged breach fema (foreign act). reports say likely send show-cause notice alleging rs 1,400 crore [link 2]. before april 2013, shifted converting itself into platform independent buyers sellers conduct business on its site. stopped working earlier where control over goods sold site as transactions were allowed under norms. per section 13 (fema), 1999, if person or entity be contravention act, after process adjudication, could liable face penalty up three times sum involved. finding investigating agency, ws retail, incorporated 2009 transact with customers, was acting front services, 2008. commenced rbi raised issue. group investors led former onmobile coo rajiv kuchhal february 2013 moved conform regulations. merely reiterates government stand yet ready allow case, like will raise money pay penalties given fact investment. none profitable there can shakeout sectorFlipkart is being probed by the Enforcement Directorate (ED) for alleged breach of FEMA (Foreign Exchange Management Act). Reports say that ED is likely to send a show-cause notice alleging violation of Rs 1,400 crore.
Before April 2013, Flipkart had shifted to the marketplace model, converting itself into a platform for independent buyers and sellers to conduct business on its site. It stopped working on its earlier model where the company had control over goods sold through its e-commerce site as such transactions were not allowed under FDI norms.
As per section 13 of the Foreign Exchange Management Act (FEMA), 1999, if any person or entity were found to be in contravention of the Act, after the process of adjudication, the person or entity could be liable to face a penalty up to three times the sum involved.
As per the finding of the investigating agency, WS Retail, a firm incorporated in 2009 to transact with customers, was acting as a front for retail operations of Flipkart Online Services, incorporated in 2008. The ED investigation had commenced after the RBI had raised the issue. Flipkart sold WS Retail to a group of Indian investors led by former OnMobile COO Rajiv Kuchhal in February 2013 and moved on to the marketplace model in April to conform with FDI regulations.
Sitharaman’s statement merely reiterates government’s stand that it is not yet ready to allow FDI in B2C companies. That being the case, companies like Flipkart will now have to raise money to pay the penalties given the fact that penalties are three times the investment. As none of the e-commerce companies are profitable there can be a shakeout in the sector.
