On Thursday, the Delhi HC directed the Enforcement Directorate (ED) to probe whether e-commerce companies have flouted FDI rules. The total list includes 21 companies and consists of prominent names like Snapdeal, Myntra, Jabong, American Swan, Shopclues, Flipkart, Homeshop18, Fashionandyou, Voonik, Infibeam, among others.
The court order came after the association of footwear manufacturers’, AIFMRA, approached the HC alleging infringement of FDI rules by certain e-commerce companies. After hearing AIFMRA, the High Court had observed that there has been "a prima facie violation" and had directed the government to file a reply.
In the petition, AIFMRA had argued that the sales made by online marketplaces have a full character of a sale to a consumer akin to that in retail. Marketplaces are obviously retailers because the payment is accepted by them, delivery is made by them, returns are taken by them and refunds are also made by them. Hence, FDI in marketplaces too should be looked at severely.
This is just the latest incident in an ongoing tussle between traditional and online retail that has stretched back for months. In May, Retailers Association of India (RAI) had also filed a writ petition seeking parity in FDI policy with e-retailers.
In a statement in September, RAI CEO Kumar Rajagopalan had said, "RAI has consistently represented to the government that e-commerce marketplaces are utilising FDI funds, dealing with customers and behaving exactly like consumers. We have sought the Government's help in clarifying the situation as FDI rules cannot be applied differently to the so-called e-commerce marketplaces while retailers are not allowed to get FDI. The e-commerce marketplaces have been behaving like retailers-they have been pricing products and have also been advertising themselves as online retail companies. We, at RAI, have been requesting the government to frame a policy that would create a level-playing field for retailers across all channels."
The problem of FDI
The topic of FDI in e-commerce is a contentious one. Though 100 per cent FDI is allowed in B2B e-commerce, what is commonly called the marketplace model, Indian laws do not allow any foreign investment in B2C e-commerce or the inventory model. This has caused a number of e-retailers to adopt the marketplace model, where the actual transaction takes place between the buyer and the seller, with the e-retailer only acting as an intermediary. However, with e-retailers expanding astronomically, there have been a number of questions asked about the holding pattern of the various companies and the source of their funding, which, is not helping matters.
Also read: Govt looks at FDI in e-retail amidst opposition
For example, in 2014, Flipkart had been under the ED scanner for allegedly violating FDI laws; a charge that was later dismissed by the ED in October 2014. However, the likes of Flipkart, Myntra, Fashionandyou, Yebhi and Jabong were being investigated by the ED as far back as 2012 too.
The e-retailers on their part have always maintained that they are in complete compliance with the laws of the land. When it comes to last week’s court directive, Sharad Thakur, Chief Business Officer at American Swan said, “As an international online Fashion and Lifestyle brand, our business model is congruent with the FDI rules set by the government. We support the move to regulate the FDI policies and streamline laws regarding foreign investment in the country and will abide by the government’s decision in this matter."
Others were less forthcoming. Flipkart, Myntra and Shopclues refused to comment. Limeroad, Voonik, Infibeam, Zovi, YepMe, Jabong and Fashionara had not replied at the time of writing of this article. All of these companies have been named in the 21 company list by the Delhi HC. Sources within some of the e-retailers said that no official intimation has been received by the e-retailers from the government yet. However, the government havsg been asked to file a reply in one month.
What experts say
Retail industry analysts have long held the view that a resolution of the FDI issue will benefit the entire ecosystem, including online and traditional retail. Paresh Parekh, Partner at Ernst & Young opined that the Indian economy would not be able to stand undoing the e-commerce sector.
This makes sense, considering the enormous investments in manpower and money made in a sector which is further expected to grow by 36 per cent between 2015-2020. PricewaterhouseCooper estimates the Indian e-retail sector grew at 34 per cent CAGR between 2009-2014 and is expected to reach $22 billion in 2015. In terms of creating employment opportunities, an Antal International report released in 2014 said the sector was expected to create at least 1.5 lakh jobs in the next 3 years.
“The issue here with (brick and mortar retail) is that they want a level playing field. Relaxing rules related to multi-brand retail FDI will help matters,” opined Parekh. But will this be enough to placate traditional retailers who are increasingly feeling threatened by e-retailers. “I think so,” said Parekh, “There will be no reason to complain. Reality of pricing and discounting is a separate issue altogether. The issue here is about parity in foreign investment.”