India’s financial crime watchdog, the Enforcement Directorate (ED), is intensifying its investigation into Walmart-owned Flipkart and Amazon India over alleged foreign investment violations. The escalation comes days after the agency conducted raids on several of the companies’ sellers, marking an aggressive step in India’s regulatory crackdown on foreign e-commerce giants. The ED’s scrutiny signals mounting government oversight at a time when Amazon and Flipkart are expanding in India’s booming $70 billion e-commerce market, despite facing significant legal and regulatory hurdles.
India’s e-commerce sector, now valued at around $70 billion, has attracted global interest, with companies like Amazon and Walmart investing billions to gain a foothold. The market has become one of the most attractive in the world due to rapid internet adoption, a burgeoning middle class, and a shift in consumer behavior toward online shopping. Yet, the sector’s growth has been shadowed by increasing regulatory scrutiny as the Indian government has sought to ensure fair competition and compliance with its foreign investment policies.
To protect domestic interests, India has maintained stringent foreign direct investment (FDI) regulations in its e-commerce sector. Specifically, foreign e-commerce companies are forbidden from holding inventory of goods for sale on their platforms. They are required to operate as third-party marketplaces connecting buyers and sellers rather than direct sellers. However, Amazon and Flipkart have allegedly circumvented these rules by partnering with select sellers, effectively allowing them to influence the sale of goods on their platforms.
The recent raids were conducted by the ED last week on several prominent sellers affiliated with Amazon and Flipkart. According to an unnamed senior government official, the raids, which lasted until Saturday, yielded evidence supporting allegations that these companies had violated foreign investment regulations. The source, who spoke on condition of anonymity, stated that the ED plans to summon executives from both Amazon and Flipkart for questioning to probe the extent of their involvement.
Following the raids, the ED is reviewing documents obtained from these sellers. The investigation will focus on the business relationships between Amazon and Flipkart and their sellers over the past five years. This inquiry, the official said, aims to determine whether the e-commerce giants have exercised substantial control over inventory, pricing, and distribution—practices that contravene India’s FDI norms for e-commerce.
Amazon and Flipkart have both denied wrongdoing and have reiterated their commitment to comply with Indian laws. However, neither company, nor the ED, has yet responded to media queries regarding the recent developments.
Under Indian law, foreign e-commerce entities are restricted to functioning as platforms that facilitate sales from independent sellers rather than operating as retailers. This legal framework intends to protect small retailers from being outcompeted by well-funded international corporations. Amazon and Flipkart are accused of bypassing these restrictions by creating exclusive partnerships with a select number of large sellers, effectively acting as indirect retailers.
These partnerships reportedly allow the e-commerce giants to influence inventory, pricing, and even product availability on their platforms, giving them a de facto control over the goods sold, which is prohibited. This alleged control has been a longstanding source of tension between India and foreign e-commerce companies.
The ED’s investigation builds on previous findings from India’s Competition Commission (CCI), which had earlier observed that both Amazon and Flipkart breached regulations by favoring certain sellers. Last year, the CCI launched its own investigation into antitrust practices within the e-commerce sector, finding evidence suggesting that Amazon and Flipkart had “end-to-end control over the inventory and that the sellers are just name-lending enterprises.” This control, CCI concluded, not only violates foreign investment laws but also harms smaller sellers.
The ED’s raid last week targeted at least two Amazon-linked sellers and four Flipkart-associated sellers, sources say. Among the sellers raided was Appario Retail, once Amazon’s largest Indian seller. Appario has been identified as a preferred partner of Amazon, receiving benefits that other sellers do not, according to a 2021 Reuters investigation. Appario allegedly enjoyed access to Amazon’s exclusive global retail tools and discounted seller fees, which helped it gain a competitive edge.
This relationship between Amazon and Appario appears to directly contravene Indian FDI rules, which explicitly prohibit foreign e-commerce platforms from maintaining inventory or having ownership stakes in any seller on their platforms. The ED is reportedly scrutinizing financial records and transactions of Appario and other sellers to determine the extent of Amazon’s control and whether this influence violated the law.
The ED’s probe into Amazon and Flipkart follows a broader regulatory trend in India, as authorities move to enforce stricter compliance within the digital economy. This pressure is not limited to e-commerce; last week, India’s competition authority also took action against food delivery giants Zomato and Swiggy. The investigation revealed that both companies were giving preferential treatment to select restaurants, thereby violating antitrust laws.
These moves underscore a broader attempt by Indian regulators to rein in perceived unfair practices by tech giants, particularly those with foreign backing. As India’s digital economy continues to grow, the government has been keen to protect domestic businesses from potential monopolistic practices and ensure that smaller players are not squeezed out of the market.
Amazon and Flipkart command a significant share of the Indian e-commerce market, with market intelligence firm Datum estimating that Flipkart held a 32% share last year while Amazon captured 24%. Together, the two companies dominate nearly 60% of the online shopping space, a sector that accounts for about 8% of India’s total retail industry, valued at $834 billion.
This concentration of market share has raised alarms among Indian regulators who fear that foreign e-commerce giants could monopolize the market, edging out smaller competitors and eroding traditional retail businesses. The government’s concern is that without regulatory intervention, companies like Amazon and Flipkart could set pricing trends, control product availability, and influence customer choices to a degree that restricts competition.
The ED’s investigation into Amazon and Flipkart could have significant repercussions for both companies. If found guilty of violating FDI laws, they may face substantial fines, operational restrictions, or additional regulatory scrutiny. The companies might also be compelled to restructure their business models to comply with Indian laws more explicitly, potentially impacting their profitability in the region.
Further, if the allegations are proven, it could lead to a tightening of FDI regulations for the entire e-commerce sector. Industry experts speculate that India may impose new regulations that prevent indirect control over inventory by any means, closing loopholes that companies currently exploit through preferred seller arrangements.
The investigation also reflects India’s desire for stronger data governance and transparency from foreign tech companies operating within its borders. As data becomes an increasingly valuable commodity, the Indian government has been wary of potential data misuse or exploitation by foreign corporations.
The ED’s actions against Amazon and Flipkart have drawn mixed reactions from various stakeholders. Domestic retailers and small business owners have praised the move, expressing hope that it will curb what they perceive as anti-competitive practices. On the other hand, consumer advocacy groups worry that additional regulatory burdens on e-commerce could raise costs for consumers, limit choices, and stifle innovation.
Industry analysts observe that the ongoing scrutiny might cause foreign investors to reassess their India strategies. Some investors fear that frequent regulatory interventions might create uncertainty and impact the long-term growth prospects of the sector. However, others argue that these measures are essential for ensuring a level playing field, ultimately leading to a healthier and more competitive market.
