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Enforcement Directorate probing VC-backed Flipkart Online for FDI norms violation

The government is probing venture capital-backed Flipkart Online Services Pvt Ltd for possible violations of FDI norms Minister of State for Commerce and Industry, S Jagathrakshakan, informed the Lok Sabha,  the lower house of Parliament, on Monday. Flipkart Online, which is backed by Naspers, Tiger Global, Accel Partners and Iconiq Capital, is a privately held wholesale retail firm which powers the country’s largest e-commerce platform, Flipkart.com.

Currently foreign investment is barred in e-commerce activities and firms have formed multiple corporate entities to legally confirm to the norms. The front end e-commerce website is owned by locals, while the venture capital money flows into a firm which is essentially into wholesale cash and carry business. This separate firm then supplies to the front end retail site as per law.

While multi-brand retailing was not allowed even for offline retailers, the government has recently announced plans to open up the sector with conditions. Large global retailers like Wal-Mart have also entered into similar corporate structures where they partner with local groups that own the front end while a joint venture involving the foreign partner runs the backend as a whole supplier. There were reports earlier that the government has been probing the existing structures used by the world’s largest retailer, Wal-Mart, in its Indian venture with Bharti Group.

However, the latest statement reveals the government is also looking at the largest e-commerce business in the country.

As per the statement issued in Parliament, “The Reserve Bank of India has informed that matters related to Bharti Wal-Mart/ Cedar Support Services Limited and Flipkart Online Services Pvt. Limited, respectively, have been referred to the Directorate of Enforcement for further investigation.”

An e-mail query sent to Flipkart spokesperson is yet to elicit a formal response and we will update you with an official take on this. The company’s founders have maintained in previous public statements that the firm meets existing FDI norms.

Enforcement directorate is a part of Ministry of Finance and is involved in probing violations related to Foreign Exchange Management Act (FEMA) besides cases of money laundering.

Flipkart Online Services recently raised an undisclosed amount in Series D round of funding led by South Africa’s Naspers Group besides Iconiq Capital and existing investors Tiger Global and Accel Partners. It is positioned as a wholesale cash and carry retailer which supplies to WS Retail Services Private Limited, a privately held firm which has the license to use the brand Flipkart.com from another entity Flipkart India Pvt Ltd.

Also read:

Devil in the fineprint: India keeps out e-commerce from FDI in multi-brand retail

(Edited by Prem Udayabhanu)

9 Comments

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ankit November 27, 2012 22:14

Hi,

This great move by the Gov. of India to check any such illegal activity (FEMA).

However, they should also check some other website Like Tradus.com which is again running with the same parameters.

Thanks,

Ankit

ajay November 27, 2012 23:00

A good step by government.
Infact opposition should do it. one place BJP says FDI is bad and then in its backyard it is nurturing flipkart (karnataka) and infibean (gujarat) both on FDI money. what is this?
Using foeign money they are heavily discounting items and thereby trying to kill local trading.
It is not good for country like us where bread and butter is retailing
it is ok for new zealand or some other rich country but certainly not india.
moreover very cleverly they are flouting FDI norms. Its like gun saying bullet killed man.
If it was also so legal then why is amazon still holding its plan to enter. are their legal experts not that good?
if these online companies want to function then they should not do on discounting model but on quality model. then its equal playing field.

Raj November 28, 2012 10:09

Ankit, Ankur:

We’ve got to be careful what we wish for. Technically most e-commerce players (Snapdeal, flipkart, indiaplaza, tradus, myntra, etc) have violated the FDI norms.

Despite the heavy discounting, only a small % of total sales in categories like mobiles and books are conducted online. Indian traders can take back the market when pricing sanity re-appears.

Also, as a consumer, why should I object if some foreign PE wants to lose money?

rahul November 28, 2012 11:11

Would be interesting to see how this case proceeds.. this could decide the fate of many top rung ecomm companies in the country.

Sun November 28, 2012 12:54

A reality check is needed…

Firstly it is extremely doubtful that over $500m worth of investment would have been made into the sector without extensive legal research. You can rest assure that in most cases there will be found to be no flouting of the law.

Secondly the reason and spirit of the restrictions on FDI were to prevent retail monsters like walmart, carrefour and tesco coming in to india. The restrictions were not conceived for this scenario where investment is going into otherwise wholly owned Indian companies. Look at the sector today, it provides employment to over one lac Indians, the sourcing is predominantly local and most importantly it has given the Indian consumer choice and access it would otherwise have to wait at least another decade for.

Lets be honest its India’s politicians who are draining the countries wealth and parking it in offshore accounts in Switzerland NOT India’s e-tailers.

Long live the e-revolution!

Vivek Sinha November 28, 2012 13:25

For many readers this would look like why accusing only Flipkart when almost all (not the marketplaces like Snapdeal where FDi is allowed) local ecom firms have foreign money.
However, in this case there could be a misjudgement (by legal advisors of the firm) in the “route” taken to circumvent the ban on FDI in e-tailing (and there are perfectly legal, though not in principle, ways to do it). The Flipkart team has taken a corrective step to confirm by the law, though pretty recently..(September 2012 to be precise).
It is highly likely that at the end of the probe the Finance Ministry/RBI would ask for a penalty payment which is usually nominal for violation of FDI norms.
The bigger issue would be how would the VC firms justify it to their own investors or LPs. Unlike India violation of norms is a serious issue in the US and the VC firms involved could be liable back home.

Binu November 28, 2012 14:28

What about Decathlon ?

Vivek Sinha November 28, 2012 15:16

Binu, Decathlon is also one of those foreign retailers who have worked around the loopholes of FDI norms to set up a store (its perfectly legal btw). Its supposed to be a wholesale cash & carry store but in effect as good as a consumer retail outlet (one just needs some signed letter from residential society authority.. to become a ‘member’ and apparently buying products for the society!!). I personally use a product bought by a so called ‘member’. So on the face a non member or a consumer cannot just buy from Decathlon (even though the outlet is free to enter for anyone) one can easily become a member and buy from it.
From what I know its a similar issue with other such wholesaler outlets operated by Metro, Carrefour and Walmart in India. Though some of them insist on some more documentation to buy from them like a service tax registration to basically prove you have your own mom & pop store.

pooja December 2, 2012 0:51

How would hyper-active and extra sensitive players like jabong react to this enquiry?

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