E-commerce firm Flipkart has come under the Government scanner due to alleged violations of the FDI norms of India. The Hindu Businessline has reported that the Indian Government has referred Flipkart and Bharti Walmart to the Enforcement Directorate for further analysis of the supposed violation.
The violations of the FDI norms and the related penalisation are covered in Foreign Exchange Management Act (FEMA). The Government’s stand on this issue is direct. They had categorically stated after allowing upto 51% FDI in multi-brand retail earlier this year that, “e-commerce in both multi- and single-brand retail is not permissible for companies with FDI”. Flipkart has been alleged to have created complex business structures to bypass the current FDI norms. This involves setting up a B2B company which deals with all the sourcing, inventory, technology and operations part of the business and a parallel B2C company which handles the invoicing and payments. Since B2B players are allowed to have 100% FDI, this amounts to a successful hack on the current regulations. In Flipkart’s case, the B2B company is called Flipkart Online Services and the B2C one is called WS Retail. The Government has now realized that this technicality might just amount to flouting of the FDI rules and preparing to take action.
If the Government decides that these B2B and B2C company structures of Indian e-commerce firms amount to violation of the norms, then this might be a bitter pill to swallow for all Indian e-commerce firms which employ the same structures for their operations.
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