The Directorate of Enforcement (ED) has intensified its scrutiny into Amazon and Flipkart, particularly regarding their relationships with sellers. This investigation primarily examines whether these prominent e-commerce platforms have violated foreign direct investment (FDI) regulations. In doing so, the ED aims to assess if these companies are exerting undue control over their vendors while operating as mere platforms, as mandated by Indian laws.

At the heart of the matter are the Foreign Exchange Management Act (FEMA) provisions that govern foreign investment in e-commerce. Traditionally, violations under FEMA are considered civil matters, typically resulting in monetary penalties rather than criminal charges. Recently, the ED conducted nationwide searches at 19 locations linked to major sellers on both Amazon and Flipkart in cities like New Delhi, Bengaluru, and Hyderabad.

As part of the investigative process, officials have summoned several sellers to explain various transactions and arrangements. They are conducting a thorough review of relevant documents, seeking to ascertain whether Amazon and Flipkart have been managing a select group of sellers who may be operating under the guise of independent vendors. This situation may reflect a breach of the established FDI norms.

Officials involved in the investigation highlighted that the next phase will not only focus on sellers but also on the e-commerce giants themselves. Key managerial personnel responsible for handling FDI matters will likely be called to participate in the investigation. The inquiry is reportedly informed by complaints about these companies exercising control over vendor operations, a practice prohibited by Indian regulations.

According to sources familiar with the matter, the ED has collected sufficient evidence to question both Amazon and Flipkart about their operational practices. The investigation has historical roots, dating back to 2019. However, it gained momentum recently due to newly uncovered actionable material.

One of the critical components under review is whether these platforms have influenced pricing strategies, which could be construed as a violation of the rules prohibiting a single seller from contributing more than 25% of a platform’s sales. Executives from both Amazon and Flipkart have consistently denied any wrongdoing, asserting that FDI regulations are strictly adhered to and that digital transactions leave a clear trace, making violations improbable in the contemporary landscape.

The implications of potential violations could be severe, leading to scrutiny from various law enforcement agencies—an outcome that poses significant reputational risks for these companies. Previous summons by the ED had already prompted detailed explanations from both companies concerning their compliance with FDI norms.

India’s FDI regulations distinctly forbid foreign-invested e-commerce companies from engaging in an inventory-based model. In December 2018, the government imposed further restrictions, preventing these companies from holding stakes in sellers or exercising control over their operations. The new rules require that the contribution of any seller to an individual platform’s sales does not exceed 25%.

Following this tightening of regulations, both Amazon and Flipkart have taken steps to divest from major sellers. For example, Clicktech, a significant seller on Amazon India, was reported to be acquiring Appario Retail, indicating the company’s intention to comply with FDI regulations by offloading its stakes in major sellers.

Moreover, the issue has drawn scrutiny from the Competition Commission of India (CCI), which is examining whether systemic favoritism towards a limited number of large sellers is providing them an unfair competitive advantage. It is essential to note that while the ED’s investigation is focused on foreign investment compliance, the CCI’s actions relate to competition fairness across the e-commerce landscape.

In summary, as the ED’s inquiry into Amazon and Flipkart unfolds, market observers are keenly watching for its potential consequences. The unfolding situation raises vital questions about the operational frameworks of e-commerce giants in India and their adherence to regulations designed to foster a fair and equitable marketplace.

As companies navigate these challenges, the emphasis remains on ensuring compliance with the stringent FDI laws that govern foreign interest in India’s burgeoning e-commerce sector.