ED to start investigating Flipkart, Amazon's relationship with sellers

The Enforcement Directorate (ED) is stepping up its investigation into whether Amazon and Flipkart’s relationships with vendors breached India’s Foreign Direct Investment (FDI) norms.

Previously, the probe was centred on large sellers associated with these e-commerce giants, but the focus is now shifting to the companies themselves, as per a report by the Economic Times.

Sources familiar with the matter revealed that the ED is scrutinising whether Amazon and Flipkart controlled vendors in ways that violate regulations, which mandate that these platforms operate purely as intermediaries and not as inventory-based businesses.

The investigation is linked to alleged violations under the Foreign Exchange Management Act (FEMA), typically resulting in monetary penalties. Nationwide searches were conducted earlier this month at 19 sites linked to prominent sellers of Amazon and Flipkart in New Delhi, Bengaluru, and Hyderabad. Officials confirmed that sellers questioned during these raids have been asked to clarify certain transactions and business arrangements.

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E-commerce giants under scrutiny

Documents seized during the searches are being carefully reviewed, with the ED focused on uncovering whether the e-commerce platforms influenced sales or prices through a select group of sellers. The central question is whether these vendors were truly independent or operating under the disguised control of Amazon and Flipkart. Once documents are analysed and individuals involved are interrogated, senior managerial figures overseeing FDI will be summoned to provide further explanations, as per the Economic Times report.

While the first phase of the investigation targeted sellers, the second phase will zero in on Amazon and Flipkart directly. Insiders claim that this issue dates back to 2019 and has been a long-running concern for authorities. Although Amazon and Flipkart have yet to be formally summoned, sources say the recent searches were triggered by new evidence deemed actionable by the ED.

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Allegations and defence

The ED’s investigation is centred on whether the platforms’ influence breached FDI regulations, such as the rule that no single seller should account for more than 25 per cent of total sales. Critics suggest that the companies may have skirted these rules despite stringent guidelines.

Executives from both companies have consistently denied wrongdoing, arguing that FDI norms are tightly enforced and claiming digital footprints make any violations nearly impossible. They assert that their business practices have been thoroughly explained to authorities in past inquiries.

Ongoing regulatory concerns

This is not the first time Amazon and Flipkart have been under the scanner. The Competition Commission of India (CCI) has also examined whether the companies offer an equal opportunity to all vendors or show preference to a select few large sellers. However, the ED’s investigation differs, focusing specifically on alleged FDI rule violations. Notably, India’s FDI regulations, tightened in December 2018, ban e-commerce companies from owning stakes in sellers or exerting control over them.

The enforcement of these rules has led Amazon and Flipkart to restructure their vendor arrangements. For instance, Amazon sold its stake in major sellers like Appario Retail to comply with regulations. While companies have made adjustments, the ongoing scrutiny highlights persistent concerns about whether e-commerce giants are playing by the rules or bending them.