Just over a month after Amazon announced a whopping $ 2 billion investment into expanding its India ecommerce operations, India’s press is reporting that an arm of the Finance Ministry is investigating the company, along with Silicon Valley favorite Flipkart and other foreign-invested ecommerce outfits, for violating the country’s laws banning foreign direct investment in retail ecommerce.
In late July, Flipkart announced it had raised $ 1 billion from global venture capital firms, the second largest investment round in 2014 after Uber — followed a day later by Amazon’s $ 2 billion commitment to India.
Leaked word that India’s Enforcement Directorate of the Finance Ministry is investigating foreign investors in local commerce — initially prompted by India’s central bank — comes as a surprise, given the many pro-ecommerce signals floated by newly-elected ultranationalist leader Narendra Modi. The investigations may represent a political feint before Modi opens up commerce to foreigners — an unpopular policy that could be devastating for India’s local retail industry and supply chain — or perhaps it could be the first sign of local institutional pushback against Modi’s plans to open up to Amazon, eBay and other giants.
Last month, Pando reported on the potentially hugely disruptive politics of allowing Big Tech ecommerce into India’s nascent ecommerce markets. The previous center-left government led by the Congress Party rejected allowing FDI into India’s ecommerce in 2012, based on worries about the potential for catastrophic disruption in retail and small and medium sized enterprises. But that sort of disruption could completely remake India’s political economy in a way much more advantageous to the ultranationalist BJP Party and its base, including India’s billionaires and its tech industry
Modi and his BJP Party are popular among India’s techies, and with Silicon Valley heavyweights Google and Pierre Omidyar, among others. In June, shortly after Modi’s landslide election victory, Pando reported that Modi’s new government met with representatives from Big Tech giants Amazon, Google and eBay and others, to forge new laws allowing foreign investment in ecommerce, particularly in the B2C retail sector. Ebay has invested nearly $ 200 million in Snapdeal, Flipkart’s leading local rival.
We also reported on how Omidyar Network’s top man in India, Jayant Sinha, simultaneously held a secret second job working to elect the ultranationalist Modi and BJP Party since at least 2012. That year, Omidyar Network was accused by India’s intelligence chief of violating India’s national security interests by funding an NGO that secretly lobbied India lawmakers on foreign investment in retail and ecommerce.
Pierre Omidyar is the chairman and largest shareholder in eBay/PayPal.
As reported by Pando, India’s current laws banning foreign ownership in ecommerce and business-to-consumer retailing has led firms with foreign investors, like Flipkart and Snapdeal, to concoct almost comical schemes to get around the laws. Fake retail companies were set up by the owners of Flipkart and others, and then “sold” to their blood relatives; while their supposedly independent B2C offices were found to be located inside the B2B warehouses. We know this thanks to an amazing business-gonzo report in 2012 by India’s Businessworld.
Modi and Big Tech have been openly supportive of each other both before and after the elections, so it’s difficult to know exactly what or why the current investigations are happening. But India has long been a difficult market to crack, and resistance to allowing in potentially catastrophic ecommerce giants like Amazon and eBay is known to be strong.
According to the Economic Times, Amazon has not been officially given notice or charged with any wrongdoing; rather, the Economic Directorate “has sought information regarding Amazon’s business model and that it is studying e-tailer’s model [sic] of online marketplace in India.”
The newspaper also reports that the Enforcement Directorate found Flipkart guilty of violating foreign direct investment laws, and may be slapped with a fine soon.
Whether or not this is Modi woofing before announcing an unpopular open FDI policy in ecommerce, or real pushback from India’s bureaucracy, retailers and small and medium-sized enterprises is yet to be seen.