Delhi HC issues notice to Centre over alleged FDI violations by Amazon & Flipkart
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Delhi HC issues notice to Centre over alleged FDI violations by Amazon & Flipkart

Varun Marwah

The Delhi High Court today issued notice to the Centre in a PIL filed by Telecom Watchdog, an NGO, for alleged violations of Foreign Direct Investment (FDI) norms by Amazon and Flipkart.

The bench headed by Acting Chief Justice Gita Mittal issued notice to both e-commerce giants as well. The case is next listed for hearing on November 19, 2018.

Until March 2016, in India, 100% FDI was permitted in B2B e-commerce. However, FDI was not permitted in B2C e-commerce. But, many companies had started selling on B2C model also.

The DIPP in March 2016, issued the Press Note 3, which defined what constitutes e-commerce activity and further differentiated between a marketplace model and inventory model. The said Press Note allowed 100% FDI under automatic route in marketplace model of e-commerce but said that the sales volume from a single seller including its group companies cannot exceed 25 percent of the gross sales. However, the FDI continued to be prohibited in the inventory based model of e-commerce.

The petitioner has alleged that to circumvent the said Press Note, both Amazon and Flipkart have created multiple entities and created “Name Lending” companies and “Controlled Sellers” through which they route hot-selling stocks in violation of FDI norms at much cheaper rates. They further allege that marketplaces have usurped the space meant for small retailers by turning into proxy sellers via their Name Lender/Controlled or Preferred Sellers.

In the case of Amazon particularly, it has been observed that this is being done through a company called Prione Business Services Pvt Ltd which in turn holds 100% equity in Cloudtail India Pvt Ltd, which happens to be the largest seller on Amazon.

Whereas Flipkart devised a new method under which it looked for some Name Lenders who would form companies and through them, the invoicing for goods would be routed. It was observed that out of several thousands of brands registered on their website, five brands appeared frequently and did not have much or no competition in their respective categories on Flipkart’s online marketplace.

Further, most of these companies were incorporated around the time when new FDI Rules were notified with exactly the same language used in their principal businesses.

It is also alleged that both Flipkart and Amazon have also created several other group companies in the chain to divide discounts/losses. According to the petition, “Exchange offers, EMI costs and bank offers are funded completely or substantially by Amazon & Flipkart and constitute a clear influence on price in violation of FDI norms.”

The petitioners have accordingly prayed before the High Court to investigate the FDI violations of Press Note 3 of 2016 by Amazon as well as Flipkart and to issue necessary direction to the Centre to initiate legal proceedings against these companies under FEMA for violations of FDI Rules.

The petition has been filed through Advocate Pranav Sachdeva.

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