Flipkart and Amazon violating FDI rules, mobile companies tell Suresh Prabhu

NEW DELHI: Handset maker’s lobby Indian Cellular Association (ICA) has urged commerce minister Suresh Prabhu to take action against Amazon and Flipkart, alleging that the ecommerce platforms are violating foreign direct investment (FDI) rules by offering discounts — directly or indirectly — on mobile phones and other products through intermediaries or partner companies.

ICA, representatives of which also met Prabhu recently, argued that the companies were circumventing rules under Press Note 3 on FDI by holding inventory and influencing the prices of electronic goods, eroding offline retailers’ revenue and putting at risk the jobs of nearly 60 million people.

“In the view of the alarming situation that the industry and India are facing, we request urgent and severe action against Amazon India and Flipkart for rampant violations of the conditions of Press Note 3 by both directly and indirectly influencing the sale price of mobile phones and other goods,” ICA wrote to Prabhu.


Amazon Denies Allegations
ET has seen a copy of this letter sent to the commerce minister last month.

The ICA, which represents handset makers such as Apple, Micromax, Nokia, Vivo, Lava and Lenovo/Motorola, also sought “necessary amendments” in Press Note 3 and other related laws to ensure that violators face “severe consequences” under the Prevention of Money Laundering Act “by treating the behaviour of the companies as an act of economic terrorism against the country.”

Amazon denied the allegations.

“Amazon remains committed to comply and is in compliance with all applicable Indian laws and regulations,” a spokesperson said.

“The prices for products on the Amazon.in marketplace are completely determined by the sellers.”

Flipkart did not respond to queries.

The complaint has revived the row between online and offline retailers, with the latter having previously alleged that online retailers were using foreign capital to provide steep discounts. They have also said the two ecommerce platforms were using companies closely linked to them to offer discounts indirectly to buyers.

Under Press Note 3, 100% FDI investment in ecommerce companies is allowed under the automatic route if the companies are engaged in business-to-business sales, not business-to-consumer transactions.

They can’t have an inventory-based model that involves goods being sold to consumers directly. Such ecommerce companies can only function as marketplaces to connect vendors with buyers and they can’t influence prices.

ICA alleged that in order to “camouflage” discounts and “losses, both Flipkart and Amazon involve various intermediaries/support entities in the chain to divide these discounts and losses”.

The methods include direct price discounts, equated monthly instalment (EMI) plans, exchange offers, cashbacks and financing costs distributed across related entities to prevent a clear assessment of the price distortion, it said.

In Amazon's case, it said these entities are Amazon Seller Services, Amazon Wholesale India Pvt., Amazon Pay and sellers on Amazon platform such as Green Mobiles, Rocket Commerce, Darshita Electronics and others. In Flipkart's case, the entities are Flipkart Internet Pvt Ltd, Flipkart India Pvt Ltd, Ekart Logistics, PhonePe and sellers on the platform such as Retailnet, SupreComnet, Omnitech Retail, Trunet Commerce and India FlashMart, ICA said.

“With these intermediaries, both Amazon India and Flipkart are able to pass discounts, without booking the same in their own books,” ICA said. “The breakdown of expenditure in various deals keeps changing to make detection difficult.”

The association said expenses on account of returns, liquidation, packaging, fulfilment cost and seller compensation are borne by entities other than the marketplace as a means of indirect discounting.

“Funding of exchange offers, EMI costs and bank offers are funded completely or substantially by Amazon India and Flipkart and constitute a clear influence on price,” it said.

Typically, companies buy mobile phones in bulk from Xiaomi and other brands via related parties and then provide them to preferred sellers or related parties. This allows discounts of up to 15% versus prices in the offline retail market, it said.

Xiaomi did not respond to queries.