Flipkart being investigated for FDI Violations

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FCPA investigations by Walmart was a major news for most of the media companies and also for the opposition party of India. Walmart being the first of the fortune five hundred companies gained all the media attenstion. However, there was another important development in the retail space related to FCPA. This was ignored by many of the media-pundits.

Indian government started its probe in the venture capital-backed Flipkart Online Services Pvt Ltd for possible violations of FDI norms. These regulations are covered by the penal provision of the Foreign Exchange Management Act, 1999. Flipkart is under the scanner for allegedly flouting FDI rules which allow e-commerce companies with foreign investment to carry out only B2B transactions not B2C.

Who are the investors ?

Flipkart is backed by Naspers, Tiger Global, Accel Partners and Iconiq Capital and is a privately held retail firm which powers the country’s largest e-commerce platform, Flipkart.com.

How do the firms bi-pass laws ?

The front end e-commerce website is owned by locals, while the venture capital money flows into a firm which is essentially into wholesale cash and carry business. This separate firm then supplies to the front end retail site.

While foreign direct investment in multi-brand retailing was not allowed even for offline retailers, the government has recently announced plans to open up the sector with certain restrictions.

Large global retailers like Wal-Mart have also entered into similar corporate structures where they partner with local groups that own the front end while a joint venture involving the foreign partner runs the backend as a wholesale supplier. There were reports earlier that the government has been probing the existing structures used by the world’s largest retailer, Wal-Mart, in its Indian venture with Bharti Group.