Flipkart, Bharti Wal-Mart being probed for alleged violation of FDI norms

Online retailer and brick and mortar retail chain Bharti Wal-Mart, will be probed by the enforcement directorate for allegedly violating the rules laid down by the government pertaining to foreign direct investment in multi brand retail.

In a press note, the government said, that it has received references alleging violation of the FDI policy be certain companies including Bharti Wal-Mart/ Cedar Support Services Limited and Flipkart Online Services.

Violation of FDI regulations is covered by the penal provisions of the Foreign Exchange Management Act, 1999 (FEMA).  The Reserve Bank of India has informed that matters related to Bharti Wal-Mart/ Cedar Support Services Limited and M/s Flipkart Online Services Pvt. Limited, respectively, have been referred to the Directorate of Enforcement for further investigation.

Two months ago, the Indian government had allowed up to 51 % Foreign Direct Investment in multi brand retail, paving way for large multi national companies like Amazon and Walmart to set shop in India. Soon after, the government said that e-commerce companies with FDI are not permissible in India.

E-commerce companies which raised millions of dollars from foreign investors were so far operating in a grey area in the absence of clearly articulated government norms specific to e-commerce. The companies set up two entities, one based in India and the other based abroad. The India based entity would be the consumer facing business which bought goods from the foreign entity at arms length pricing. The investments were made into the foreign entity which conducts its “cash and carry” business in India, as allowed by Indian laws. The practice came into question as the FDI in retail debate heated up.

In the case of brick and mortar stores, the central government had left the final decision in the hands of state governments. The Indian government, however, is bound by international trade laws to provide uniform treatment to foreign businesses throughout the country.