Flipkart Circumvents India’s FDI Norms

The Indian government has been defensive about opening up its retail sector to global companies such as Wal-Mart and Amazon. This is the reason why the country only permits 100% foreign direct investment in single-brand retail. This means that companies like Levis or Benetton can own and operate stores because they only sell one single brand. On the other hand, supermarket chains sell multiple brands from the same store. As of now, the Indian government does not allow more than 49% foreign ownership in such ventures.

Amazon and Flipkart: Bending the Rules

Over the past few years, tech giants have used the cover of technology to blur the lines between single and multi-brand retail. Companies like Flipkart and Amazon have been blatantly circumventing the law. In effect, Amazon and Flipkart have been running multi-brand retail stores with majority backing from a foreign financial company. Let’s have a closer look at the earlier structure which was being followed by e-commerce companies to understand this further.

The Earlier Structure

Technically, Amazon and Flipkart act like marketplaces. This means that they claim to be companies like eBay which only provide a platform where buyers and sellers meet. It is true that Amazon and Flipkart do allow local retailers to enlist their products on their websites. However, these retailers account for a very small percentage of the total sales.

A large majority of the sales come from pass-through shell vendor companies which have been created by Amazon and Flipkart. For instance, Cloudtail sells a lot of products on Amazon. Technically cloudtail is an independent retail company whose office is registered in India. However, the reality was that Cloudtail was created only to circumvent the rules.

Hence, the wholesale arm of Amazon would directly sell to Cloudtail who would then sell to the Indian consumer. It doesn’t take a genius to figure out that the existence of Cloudtail is only an eyewash. In reality, Amazon is directly operating a multi-brand retail store in India by bending the rules.

What Were The New FDI Norms?

After several protests by Indian retailers, the Indian government finally took cognizance of the illegality of this operation. In order to prevent this from happening, the Indian government created a rule that retailers like Cloudtail should not be allowed to buy from companies in which more than 25% of the inventory is controlled by the e-commerce firm itself. Hence, this rule was meant to break the proxy route using which Flipkart and Amazon were breaking the law.

What Was The Intent of these Norms?

The Indian government was of the opinion that new regulations would put an end to the potentially illegal operation that Amazon and Flipkart had been running. The Indian government wanted these e-commerce sites to truly become marketplaces where small and medium sellers can sell their products. If the supply chain of companies like Cloudtail is broken, the smaller buyers will become more competitive. Hence, the Indian government was only trying to look after the interests of its small scale industry.

How Flipkart Is Circumventing These Norms?

However, Flipkart and Amazon have once again used their legal think-tank to find a way to outsmart the Indian government. It turns out that the 25% rule is not enough to stop these companies from bending the rules.

• The rules stipulate that companies like Cloudtail (local proxy sellers for Amazon) must not buy products from companies in which more than 25% of the inventory is controlled by the e-commerce firm.
• Since Amazon wholesale cannot directly sell to Cloudtail, e-commerce companies are planning to enlist the use of another intermediary called the Alpha sellers
• In this arrangement, Amazon or Flipkart will then sell its goods to Alpha sellers. Now, these Alpha sellers already have a business. Hence, Amazon and Flipkart do not control more than 25% of their inventory
• This sale will only be a paper transaction. The so-called alpha retailers will not bear any risk of ownership. They will simply be pass through entries which will receive and send invoices. Since they will not bear any risk companies like Flipkart and Amazon are providing them a fixed return for their co-operation.
• Finally, these companies will sell the same goods to companies like Cloudtail (beta sellers) who will once again sell them to Indian consumers. The entire purpose of this alpha-beta arrangement is to negate the effect of the new regulation which was introduced by the government.

Conclusion

It is difficult to decipher such actions and put a meaning to them. On the one hand, there are critics who believe that these acts amount to breaking the law in spirit and hence must be punished. On the other hand, many believe that Flipkart and Amazon are being innovative and avoiding the unnecessary regulation and red-tape which is coming their way.

However, it is unlikely that the Indian government will take this lying down. Since this is an election year and small traders form a huge chunk of voters, it is likely that the government will crack down on this alpha-beta strategy.