Business
Amazon and Flipkart In The ED’s Crosshairs Again; But What Is The Real Play Behind The Scenes And Is The Scrutiny Fair?
Picture this, You’re scrolling through Amazon or Flipkart, lured by deep discounts and tempting deals. But have you ever wondered how these prices stay so low? Well, the Enforcement Directorate (ED) is asking the same question—but with a sharper edge. Their concern? Whether these e-commerce giants are bending—or outright breaking—India’s strict Foreign Direct Investment (FDI) norms to keep those discounts flowing, possibly at the expense of small retailers.
The Big Question, Are Discounts Too Good to Be True?
India’s FDI rules for e-commerce are crystal clear. Platforms like Amazon and Flipkart are meant to be neutral marketplaces connecting buyers and sellers. They cannot operate as inventory-led businesses or have control over vendors. And yet, the ED is probing whether these platforms are pulling strings behind the scenes to control sellers, influence prices, and dominate the market.
The rules are designed to level the playing field, particularly for India’s countless small retailers, who simply can’t match the prices offered by these online giants. But the allegations suggest a different story.
Preferred Sellers: It’s alleged that Amazon and Flipkart operate through a handful of preferred sellers. These sellers are reportedly controlled by the platforms but are presented as independent vendors.
Discount Games: The ED suspects that the platforms may be indirectly funding these sellers to enable jaw-dropping discounts, thus sidelining smaller players.
Sales Limits Breached: FDI norms mandate that no single seller should contribute more than 25% of a platform’s total sales. The ED is questioning whether this limit has been respected.
The ED’s probe isn’t new—it dates back to 2019. However, the investigation recently gained fresh momentum, thanks to what officials describe as “actionable material.”
Earlier this month, the ED conducted nationwide searches across 19 locations, targeting major sellers associated with Amazon and Flipkart in Delhi, Bengaluru, and Hyderabad. Officials are combing through documents and grilling sellers about their financial transactions and arrangements with the platforms.
According to sources: “The sellers covered during the searches were summoned and questioned to explain certain transactions and arrangements. The main focus is to ascertain whether Amazon and Flipkart operated through a preferred set of sellers, which were invariably controlled by them but disguised as independent vendors.”
What’s at Stake?
This isn’t just about FDI compliance; it’s about the survival of India’s small retailers. If these allegations hold water, it would mean that the platforms have systematically undercut traditional businesses, leveraging their deep pockets and clout to dominate the market.
For Amazon and Flipkart, the stakes are equally high. Any proven violations could lead to hefty fines and severe reputational damage, not to mention potential restrictions on their operations in India—a market they can’t afford to lose.
Denials and Defenses
As expected, both Amazon and Flipkart have denied any wrongdoing. Their executives argue that FDI norms are stringent, and the digital footprint of transactions leaves little room for manipulation.
“FDI norms are very stringent, and now, with most of the transactions having a digital footprint, it is impossible to violate them,” said an executive.
They also point out that similar queries have been raised by the Competition Commission of India (CCI) in the past, and they’ve provided detailed explanations each time.
Interestingly, Amazon and Flipkart have taken steps to comply with FDI norms—or at least appear to. For instance:
Amazon divested its stakes in major sellers like Cloudtail and Appario Retail after the 2018 tightening of FDI rules.
Flipkart has also restructured its relationships with key sellers. But the ED’s probe is questioning whether these moves were merely cosmetic. The suspicion is that control over these sellers may have been retained through indirect means.
What’s the Backstory?
When it comes to Amazon and Flipkart, controversies surrounding their compliance with India’s Foreign Exchange Management Act (FEMA) and Foreign Direct Investment (FDI) norms seem to be a recurring theme. The latest Enforcement Directorate (ED) raids conducted on November 7 have once again placed these e-commerce giants in the spotlight.
Let’s rewind and piece the puzzle together.
The ED conducted nationwide raids on Nov 7 targeting sellers associated with Amazon and Flipkart. The raids spanned 19 locations across New Delhi, Mumbai, and Bengaluru. The focus? To investigate whether these platforms are indirectly influencing the selling prices of goods, violating FDI norms in the process.
This isn’t just an isolated investigation—it dovetails with findings by the Competition Commission of India (CCI). A massive report released by the CCI in August 2023 outlined several anti-competitive practices by these platforms:
Preferential Treatment: Certain sellers received priority placement in search results.
Selective Deals: Amazon and Flipkart allegedly provided exclusive deals and inventory support to preferred sellers.
The findings were damning, with the CCI explicitly stating that allegations of anti-competitive practices had been investigated and proven true.
A History of Scrutiny
The November 7 raids aren’t the first time Amazon and Flipkart have come under the ED’s scanner. Over the years, these companies have faced repeated allegations of skirting India’s stringent FDI rules.
2020: Traders Raise the Alarm
In 2020, the Confederation of All India Traders (CAIT) urged the Department for Promotion of Industry and Internal Trade (DPIIT) to act against these e-commerce players. CAIT accused the companies of controlling inventory—a clear violation of the FDI law that mandates e-commerce platforms to function as neutral marketplaces.
2021: Show Cause Notice to Flipkart
Flipkart was issued a massive show cause notice worth ₹10,600 crore for allegedly flouting FEMA norms.
Allegation: Flipkart was selling goods through WS Retail, a related party, in violation of FDI norms.
Foreign Investments: The company also faced accusations of attracting foreign investments improperly.
At the same time, an investigation by Reuters revealed that Amazon was favoring certain sellers by offering exclusive deals and influencing their inventory management—a direct contradiction of its role as a neutral marketplace.
Patterns of Non-Compliance
What emerges is a consistent pattern where Amazon and Flipkart are accused of bending rules to maintain their dominance:
Control Over Sellers: Allegedly influencing seller inventories and pricing strategies.
Preferential Treatment: Providing better visibility and deals to select sellers.
Opaque Transactions: Using complex structures to conceal direct or indirect control over marketplace operations.
The latest ED raids are an attempt to dig deeper into these alleged practices.
It’s worth noting that Amazon and Flipkart don’t just have the ED to worry about. The CCI’s reports and previous legal notices from other regulatory bodies show the extent of scrutiny these companies face.
Impact of CCI Reports
The CCI’s exhaustive reports (1,027 pages on Amazon and 1,696 pages on Flipkart) highlight systematic anti-competitive behavior. From search algorithms favoring certain sellers to backend deals that flout the spirit of FDI rules, the CCI findings lay the groundwork for regulatory action.
India’s FDI laws for e-commerce are designed to ensure a level playing field:
E-commerce platforms can’t control inventory or influence pricing.
Sellers can’t account for more than 25% of sales on a single platform.
Repeated violations of these rules not only harm small businesses but also erode trust in these platforms.
The Need for Stricter Compliance with FDI and Competition Laws
To grasp the current debate, let’s first understand the framework of India’s e-commerce laws. “FDI laws recognize two types of e-commerce models: the marketplace model and the inventory-based model,” explains Kinjal Champaneria, Partner at Solomon & Co.
E-commerce platforms are also legally bound to promote fair competition and must not directly or indirectly influence the pricing of goods and services sold on their platforms.
“Sellers with equity participation or inventory control by the e-commerce marketplace entity or its group companies are prohibited from selling on the same platform,” states Vaibhav Kakkar, Senior Partner at Saraf and Partners.
If the allegations hold, Amazon and Flipkart could face significant financial penalties based on the scale of foreign transactions. Kinjal Champaneria adds, “Should the Enforcement Directorate find sufficient evidence, criminal proceedings could also be initiated against the responsible parties.”
Clarifying the Law
At the core of this issue is a clear directive in India’s FDI policy: these platforms are authorized to operate only in the business-to-business (B2B) space, not in direct business-to-consumer (B2C) transactions. Furthermore, e-commerce platforms cannot mandate sellers to sell products exclusively on their platform.
Why These Investigations Matter
What makes this probe so critical? According to Ketan Mukhija, Senior Partner at Burgeon Law, “This investigation underscores India’s increasing regulatory focus on foreign-backed e-commerce platforms, emphasizing the importance of transparency and compliance with FDI policies.”
With platforms like Amazon and Flipkart wielding significant influence over the e-commerce ecosystem, stricter enforcement of these regulations could reshape the industry. It may also drive greater alignment with domestic business interests, Mukhija notes.
The ongoing ED investigation coincides with findings from the Competition Commission of India (CCI), which recently released a detailed report alleging anti-competitive practices by these platforms.
The CCI report revealed that both Amazon and Flipkart demonstrated favoritism towards select sellers. For instance:
–Amazon entered exclusive arrangements with certain sellers, skewing competition.
–Swiggy, in a similar vein, promised business growth in exchange for exclusivity agreements.
Such practices not only undermine fair competition but also contradict the regulatory intent behind India’s e-commerce policies.
The Final Words
As investigations unfold, the emphasis on strict adherence to FDI and competition laws has never been more critical. The outcomes could set a precedent for the future operations of foreign-backed platforms in India, fostering a more transparent and equitable e-commerce ecosystem.
The investigation is far from over. While the first phase focused on sellers, the ED’s next target will be the e-commerce giants themselves. Key managerial personnel who oversee FDI operations are likely to be summoned for questioning.
“Once all search-related documents are studied and people linked to them are questioned, key managerial personnel will be asked to join the probe,” said an official. With fresh evidence in hand, the ED seems determined to get to the bottom of this.
The stakes are high—not just for Amazon and Flipkart but for the entire industry. With regulators tightening the reins, the road ahead for these platforms will likely demand more accountability and a renewed commitment to compliance.
So, the next time you snag a deal online, remember—it might be cheaper than you thought, but there’s a lot more at play behind the scenes.