PIL in Delhi HC alleges e-commerce entities violating FDI Norms

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A PIL was lodged with the Delhi High Court on Monday, July 30, 2018, accusing e-commerce giants Amazon and Flipkart of breaking FDI (foreign direct investment) norms and violating rules in order to make huge revenues and render small sellers uncompetitive by a wide margin.

Facts of the case

An NGO, Telecom Watchdog, after making four complaints to the Central government against the e-commerce sites and failing to receive any feedback had approached the Delhi High Court and filed the PIL through their advocate Pranav Sachdeva. The plea alleged, “Amazon and Flipkart have created multiple entities to circumvent the FDI norms and route the hot-selling stock at cheaper rates. As a consequence of this FDI norms violation, smaller sellers are unable to participate in the fast-growing e-commerce sector. Due to subsidized prices on such platforms, small sellers are unable to sell in the brick-n-mortar world too.”

In their petition, Telecom Watchdog contended that according to Press Note 3 of 2016, which is responsible for regulating e-commerce sector, it was mandated that enterprises like Amazon and Flipkart are not to exercise ownership over the stock, nor directly or indirectly influence the price of goods and services sold on their marketplace. But to circumvent such rules e-commerce sites like Amazon and Flipkart create name lending companies, buy branded goods in bulk at discounts from manufacturers and sold them through this lending companies, ruining small sellers’ businesses and thus, violates the FDI norms by influencing the market price of goods.

The petitioner further claimed, “exchange offers, EMI costs and bank offers are funded completely or substantially by Amazon and Flipkart and constitute a clear influence on price in violation of FDI norms.” To circumvent FDI norms Amazon had created companies like Cloudtail and  Prione enterprise, which is a joint venture between Amazon and Catamaran company, where Catamaran’s major shareholder is Infosys co-founder, Mr N. R. Narayana Murthy. The case was filed under the Foreign Exchange Management Act (FEMA) which regulates FDI and other foreign investment in our country.

Court ruling

The writ petition filed under Article 226 of the Constitution of India for enforcement of rights and under Articles 14 and 21 of the Constitution seeking a mandamus was heard by Acting Chief Justice Gita Mittal and Justice C Hari Shankar. It was brought under court’s notice that e-commerce sites practise business in all the four major market segments: Business to Business (B2B), Business to Consumer (B2C), Consumer to Consumer (C2C), and Consumer to Business (C2B). In India 100 per cent FDI is allowed in B2B e-commerce, but FDI was not permitted in B2C e-commerce as early as March 2016. Many companies, irrespective of that rule, had started selling on the B2C model also.

Hence, All India Footwear Manufacturers and Retailers Association (AIFMRA) had filed a petition with Delhi High Court in 2015 to address this grave issue. While the petition was pending with the Court the DIPP (Department of Industrial Policy & Promotion) under commerce ministry, Government of India, issued new guidelines through Press Note 3 which clearly delineated that as per new guidelines the government has allowed 100 per cent FDI under automatic route in marketplace model of e-commerce, but also mentioned that the sales volume from a single seller including its group companies cannot exceed 25 per cent of the gross sales. This was done with a view to protecting small and medium-sized businesses from enjoying their respective market share.

The Court taking cognizance of the case issued a notice to the Central government who was also named as a respondent in this PIL and asked for their response within November 11 of this year; the case will be heard next at that date.

PIL and its impact

In India, the BJP government’s agenda was Make in India campaign which focuses on the development and growth of small and medium-sized businesses in a bid to ensure their free and unhindered growth. Even when FDI (foreign direct investment) was discussed in the early 90s it was held that allowing widespread FDI in all business sectors would jeopardize the small sellers and retailers future. But in the era of globalisation, India had to open its market to FDI as a means to boost its economy and also to enter into the global business market.

But still, certain guidelines and rules were placed much to the vexation of foreign investors so that they do not monopolize the Indian market and impact on the lives of the small business owners. Despite stringent guidelines, due to lackadaisical and indecisive executive action, Indian MSME (Micro, small and medium enterprises) are daily facing the brunt of these corporate giants. Indian policymakers need to urgently focus on making laws and guidelines protecting the interests of these small sellers.

Besides, the world has already entered the 4th Industrial revolution which is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres. E-commerce is quickly and quietly replacing traditional business practices as easily as e-payments is replacing the need for paper currency. In this era, foreign manufacturers through their direct websites can venture into Indian markets enticing consumers with their better and cheaper qualities of goods and services, thus, making them out of reach of Indian laws and regulations, and also evading billions of dollars of tax revenues. This case highlights the future dire consequences that may befall if our lawmakers are still not readying themselves to address this concern.

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