Flipkart Staring At $1.3 Billion Fine: ED Comes Down Heavily On Flipkart Founders and Investors

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The eCommerce behemoth Flipkart is staring at the penalty which could be one of the highest penalties any indian tech company has ever received. According to a Reuters report, the Enforcement Directorate asked the management of the indian eCommerce giant to explain why ED should not slap a $1.35 billion fine on Flipkart for alleged violations of foreign investment laws.

ED is investigating both Flipkart and Amazon.com. Both the companies are accused of trying to evade foreign investment laws. These laws strictly regulate multi-brand retail, and limit such companies from operating a marketplace for sellers.

The case is connected to an investigation into allegations that Flipkart attracted foreign investments and the used WS Retail, the in-house vendor, to sell goods to consumers through its shopping portal. This is contrary to law according to the Enforcement Directorate’s official sources. WS Retail used to account for 30% – 40% of Flipkart’s overall sales before it pulled itself out from the unbrellal of Flipkart in 2018 after much is uproar and hullabaloo.

Fine On Flipkart: Big Picture

  • In July, ED issued a “show-cause notice” to Flipkart founders Sachin Bansal & Binny Bansal as well as its current investor Tiger Global. They wanted an explanation of why they shouldn’t face a 100 billion rupees ($1.35 million) fine for their lapses between 2009 and 2015.
  • The agency quoted a Flipkart spokesperson as saying that the company was “in compliance” with Indian laws. Flipkart’s spokesperson said that the company would cooperate with authorities in examining the issue.
  • These notices are not public and cannot be shared with others. Flipkart and other parties are given around 90 days to respond. WS Retail pulled out of Flipkart in 2018 and registered as a seperate entity.
  • Walmart bought a controlling stake of Flipkart in 2018 for $16 billion, making it the largest e-commerce transaction. Sachin Bansal sold all his stake in Flipkart to Walmart, while Binny Bansal kept a small share.
  • This notice is seen by the online retailer as a regulatory hurdle at a time of increased restrictions and antitrust investigations in India, along with growing complaints from smaller sellers.
  • Two days ago, Dazeinfo reported that besides e-commerce companies, many payment gateways are also under the lens of Enforcement Directorate alleged for FEMA violation.

Food For Thought

Brick-and-mortar stores have been blaming e-commerce giants Flipkart and Amazon for favoriting certain sellers on their platforms for years now. They also use complex business structures to avoid foreign investment laws, which can hurt smaller players. They, however, deny any wrongdoing.

While ED has sent a showcase notice only to Flipkart, Amazon is also accused of exercising similar wrongdoings and is under the radar of ED. Reuters’ investigation based on Amazon documents revealed that Amazon had provided preferential treatment for many years to a few sellers, especially Cloudtail, which is, just like Flipkart, is largely owned by Amazon. It also publicly misrepresented ties and used them as a way to avoid Indian law. Amazon has also denied any preferential treatment.

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