Alleged FDI rule violation by e-commerce players via discounts: NCLAT asks Walmart-Flipkart to explain business model

By: | Published: September 8, 2018 5:42 AM

Apex regulator’s move brings to focus alleged FDI rule violation by e-commerce players via ‘discounts’.

walmart, e ommerce industry, ecommerce sectorIndia’s FDI policy bars e-tailers from influencing pricing of products sold on their platforms by giving discounts themselves. (PTI)

The National Company Law Appellate Tribunal (NCLAT) has asked Walmart and local e-commerce platform Flipkart, which has just been acquired by the US-based retail biggie, to explain their business models in India. The move is important as the so-called ‘deep discounts’, offered by foreign-funded e-commerce companies in alleged violation of the FDI rules, continue to be an irritant for policymakers. Ambiguity persists on how effectively such ‘non-compliance’ is being handled by the enforcement agencies.

The NCLAT, which is also an appellate authority over the Competition Commission of India (CCI), has asked Walmart International Holdings to file its reply before it by September 20, 2018. It has also asked traders’ body CAIT, which has filed an appeal before NCLAT challenging the go-ahead by the CCI on Walmart’s $16 billion acquisition of Flipkart, to file its understanding over the retail major’s business model in India.

“Before going into the merit of the appeal, we intend to know the manner in which WalMart International Holdings, Inc. and Flipkart Private Ltd do their business in the relevant market in India,” said an NCLAT bench headed by chairman Justice SJ Mukhopadhaya.

India’s FDI policy bars e-tailers from influencing pricing of products sold on their platforms by giving discounts themselves. For their part, ecommerce players have maintained that they haven’t violated any FDI rule and that discounts are not given by them but by the sellers on their platform.

While clearing the Walmart-Flipkart deal as one that “won’t have an appreciable adverse effect on competition” in India, the CCI had said that the complaint about Flipkart’s discounting practice or preference to select e-tailers is not specific to this merger deal and is “already prevalent” in the market.

The CCI had said, “Upon examination of the relevant facts, it was found that a small number of sellers in Flipkart’s online marketplaces contributed to substantial sales. Almost all of these were customers of Flipkart in B2B segment, and hence were common customers, availing significant discounts from Flipkart in both B2B segment as well as in the online marketplaces.” It added that the revenue earned from these common customers in the online marketplaces was also relatively less vis-à-vis the non-common sellers whose sales on the platform were considerably low.

But the regulator said that this is a matter of consideration for the appropriate regulatory/ enforcement authority. “The issues concerning FDI policy would need to be addressed in that policy space to ensure that online market platforms remain a true marketplace providing access to all retailers,” it had said.

Currently, while the Department of industrial Policy and Promotion formulates and notifies FDI policies, including those on e-commerce, any violation of such rules is dealt under the penal provisions of the Foreign Exchange Management Act (FEMA). This Act is administered by the Reserve Bank of India, and the ED is its enforcement authority.

Earlier, on August 18, Walmart had informed that it has completed a deal with Flipkart and holds 77% stake in the Indian e-commerce major. Walmart India, a wholly-owned subsidiary of Walmart Inc, owns and operates 21 Best Price Modern Wholesale stores in eight states in the country.

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