For years, Amazon and Flipkart have claimed to be “marketplaces”, where small sellers can set up their businesses and reach consumers. This was in part necessitated by India’s FDI rules around e-commerce, which don’t allow foreign entities to hold inventory and directly sell goods to end users. But an Enforcement Directorate investigation has found that there might’ve been more than meets the eye to Flipkart and Amazon’s marketplace structure.
The ED has found “direct links” between Amazon and Flipkart and their preferred sellers, Economic Times reports. An ED investigation into the two companies under FEMA laws revealed that most preferred sellers on the two e-commerce platforms were either former employees of the companies, or relatives of former employees and associates. The ED believes that these were essentially shell entities which were controlled by Amazon and Flipkart, and were used to circumvent Indian laws on FDI in e-commerce.
The discoveries were made following raids on warehouses of sellers of Amazon and Flipkart last week. The raids recovered “email dumps” from these sellers, which helped ED establish connections between them and the two e-commerce platforms. The raids found that Amazon and Flipkart had “direct control” over these preferred sellers, with everything from warehouses to inventory to profit margins being in direct control of the two e-commerce giants.
The raids uncovered some egregious examples as well. In one instance, a seller was found to have a turnover of Rs. 25,000 crore, but had an annual profit of just Rs. 20 lakh. This seller with a Rs. 25,000 crore turnover lived in a modest two-bedroom flat. This indicated that the seller was being used only to bill the turnover, while the profits and the margins were being controlled by Flipkart and Amazon.
“The FDI rules stipulate making a strong marketplace where everyone including small-time retailers can sell their products,” an ED official told ET. “But by controlling the inventory stock, warehouses, profit margins and auditors of their sellers, Amazon and Flipkart have violated FDI rules by reducing the marketplace to a multi-brand sale platform only for their own gains,” they added.
This isn’t the only way that these companies have looked to circumvent India’s FDI laws. Until not too long ago, Amazon had created an entity named Cloudtail with a majority stake of Narayan Murthy and a minority stake of Amazon, which allowed it to directly sell products to consumers. The partnership ended in 2022 after scrutiny from regulators, but it appears that both Amazon and Flipkart have moved on to indirectly controlling their preferred sellers through which they’re again circumventing India’s e-commerce laws with impunity. It remains to be seen how the ED acts upon its findings, but the fact that foreign companies can openly defy Indian regulations for years isn’t the best look for the country’s reputation a sovereign entity representing 1.4 billion people.