/Amazon and Flipkart are in Rampant Violations of FDI rules

Amazon and Flipkart are in Rampant Violations of FDI rules

Dr Rashmi Das
Dr Rashmi Das has authored the book, “E-com in India: Violations & Tax Avoidance”, which provides deep insights into the complex maze of e-commerce operations in India. Dr Das is also the Founder of Live Media and is the Editor of TelecomLive & InfraLive. Shelley Vishwajeet interacted with Dr Das to elicit her informed views on various aspects of e-commerce conundrum.

Do you believe that large online marketplace /platforms such as Amazon and Flipkart have been circumventing / violating laws and regulation related to e-commerce in India to gain undue competitive advantage over physical / traditional retail stores?

Amazon and Flipkart are in rampant violations of FDI rules. Both engage in unfair discount practices and have tax avoidance profiles. FDI violations are comprehensive. It is happening both in the marketplace and inventory business regulations. The methodology for circumventing FDI rules has three components – creation of fronts, name lenders and network of controlled sellers. So, this is just not about undermining conventional retail or eking out an unfair competitive advantage, these are serious economic offences of multiple dimensions.

Both Amazon and Flipkart have created multiple entities to carry out their violations and also to influence price. This is done both directly and indirectly through a complex labyrinth of companies that makes the clear assessment of price distortion very difficult. Price is influenced through direct price discounts (price drops), marketing expenses (marketing campaigns, EMI, exchange offers), logistics (packaging, courier, returns etc.), wallet cash backs and financing cost.

Both Flipkart and Amazon involve various intermediaries/support entities in the chain to divide these discounts/losses. Ultimately heavy losses or very little profit is reported. Such practices carried on relentlessly have severely damaged the traditional retail sector.

Dr Das, do you believe that e-commerce platforms have been particularly violative of Press Note 3/2016, especially when it comes to the circumvention of clauses related to B-2-B & B-2-C norms?

Definitely so.PNPN3/2016 as government policy arose in the context of bitter legal wrangles and was supposed to be a balancer between fast growing e-com & traditional retail. It had a good rationale. Therefore, while it allowed certain things, it explicitly forbade others. PNPN3/2016 allows 100 pc FDI under automatic route in marketplace model of e-com. But there is a rider. Sales volume from a single vendor/group company of the marketplace cannot exceed 25 pc of its gross sales. FDI is disallowed in inventory-based business model. However, in the real world, large marketplaces like Amazon and Flipkart are running inventory-based operations. This, it has achieved through a network of ‘controlled sellers’ and web-like company structures. Prior to PNPN3/2016, Cloud tail was the single largest seller for Amazon and WS Retail for Flipkart. Both had an individual share of nearly 50 per cent on their respective platforms. Cloud tail and WS Retail were the ‘Big owned sellers’. Post PNPN3/2016, instead of single large sellers, both marketplaces have created smaller sellers, with the same amount of control that they had on the Cloud tail & WS Retail. By replacing big ‘owned sellers’ with smaller ‘controlled sellers’, marketplaces have effectively nixed PN3.

Now let us consider a company structure example. On Amazon Seller Services Pvt Ltd, Amazon’s marketplace company, Cloud tail India Pvt Ltd is the largest seller. But Cloud tail is in effect an inventory-based operation and an archetypical FDI violation format. Cloud tail is owned through an intermediary structure, called Prione Business Services Pvt Ltd. Prione in turn is owned 49 pc owned by Amazon and 51 pc by Infosys co-founder N.R. Narayana Murthy and some of his relatives through Catmaran Advisors. Catamaran holds these equity shares in Prione as trustee of Hober Mallow Trust (HMTMT), the beneficiaries of this trust are not known.

Amazon created this structure since the Indian regulation ignores FDI in the intermediary entity if “more than 50 per cent of the equity interest in it is beneficially owned by resident Indian citizens and Indian companies, which are owned and controlled ultimately by resident Indian citizens.” The beneficent ownership of this company is with Amazon. Mr Narayana Murthy and his relatives are name lenders. , they make no money on this operation, since Cloud tail booked a loss of Rs 30 crore and in signature Amazon style had zero tax liability.

Particularly in high demand/high selling items such as mobile phones, the e-commerce platforms have been accused by physical retailers of indulging in regular marketing malpractices and distorting the market itself. Your take on this please!

The prevalence of a network of controlled-preferred sellers have ejected the smaller sellers in the online domain. The physical retail business which is worth Rs 4, 00,000 crore involving over seven crore retailers has suffered substantial losses. Flipkart and Amazon control inventory in the popular categories like mobiles, electronics, kitchen appliances, branded clothes and shoes etc and leave no space for small sellers to participate in a gainful manner.

So how does a regular marketing malpractice look like? Discounts to the customers are arranged through a web of companies. Amazon Wholesale India Pvt Ltd buys in bulk from manufacturers of popular categories and routes the goods to Amazon controlled sellers at a discount and books a loss in its books. Amazon Seller Services also pays for other services such as marketing and books these as expenses. Similarly, Flipkart India Pvt Ltd buys branded goods in bulk from manufacturers then routes them through controlled sellers at a discount and books a loss. Flipkart Internet Pvt Ltd pays for marketing, exchange offers etc while wallets like Phone Pe provide discounts through cash backs.

In this manner, both companies heavily influence price. They clock massive turnovers because of discounted sales, at the same time they bear nil tax liability because they book losses. And they receive periodic infusions from their overseas parent companies. This triad of maximum turnover, no profitability-no tax and periodic infusions must be investigated. The Delhi High Court has recently directed the Enforcement Directorate to submit its findings on these practices.

What does the government / regulators need to do to create a level playing field between E-retailers and Physical retailers?

PN3/2016, which is the present policy, takes care of the level playing field concerns. It has adequate safeguards like disallowance of FDI in inventory, 25 per cent cap on sales from one vendor on the online platform. Had it been strictly implemented, small retailers and MSMEs could have used these channels to sell across geographies. Physical retailers had also started forming clusters for enhancing their purchasing power but while they access funds at 12-14 per cent, e-commerce companies access it at very nominal rates. Physical retailers have been overwhelmed. PNPN3/2016 shows that a good policy can be easily overturned by bad and negligent implementation.

What is your take on the first glimpse of the ‘New Draft Policy on E-commerce’?

An elaborate structure of a Think Tank, Task Force and nine sub-groups was created for e-commerce policy making. Two-Three proposals stand out. First, the ED is to be strengthened, a direct result of FDI violations and there is to be a separate wing in the Directorate of Enforcement to deal with PNPN3 violations. Second, there is a proposal to introduce 49 pc FDI in inventory based B2C model. Currently this is disallowed and seems to be a ploy to regularize the current violations of the e-commerce companies. This will become very controversial. Third, there is a proposal that the restriction imposed on e-commerce marketplace to not influence price of sale of goods directly or indirectly would also be applicable to e-com marketplace group companies. This will be used to show that PN3 was not applicable to e-com marketplace group companies and will become applicable in future. Again, it will be used for regularising violations.

Technology is a big disruptor and change will always happen, even in market place / market formats. Do you think, physical retailers want a protection against something that is totally an outcome of technological advancements?

Yes, change will happen and it must happen but that process has to be fair. The charges against e-commerce companies are based on empirical data, they are neither conjecture, nor accusations leveled by competitive sectors. The conduct of e-commerce companies is indeed a cause of serious concern.

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Shelley Vishwajeet is Editor, My Mobile. He has previously worked at senior positions with Business India, 21st Century Fox (Star Television Group), Indian Express Group, The Observer etc. He has also co-authored two well received books including Superbrands India. Shelley is an alumnus of Sri Ram College of Commerce and Faculty of Law, Delhi University; as well as Jawaharlal Nehru University, New Delhi

Comments

  1. Hi. This is Ch.Krishna, President, Federation of All India distributors associations. Popularly known as FAIDA- (Organisation omingst the dealers of FMCG, FOODS, MOBILES AND TELECOM Distributors). I have more evidences on violations of selling the products by FDI based Walmart and Metro. Pl ask competent authority to call me or provide confidential email id for forwarding the same.

  2. Hi. This is Ch.Krishna, President, Federation of All India distributors associations. Popularly known as FAIDA- (Organisation omingst the dealers of FMCG, FOODS, MOBILES AND TELECOM Distributors). I have more evidences on violations of selling the products by FDI based Walmart and Metro. Pl ask competent authority to call me or provide confidential email id for forwarding the same.

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