Blatant violation of Indian laws on trading and e-commerce by Walmart owned Flipkart
Copy of Letter to Shri Piyush Goyal from Confederation of All India Traders
Dear Shri Piyush Goyal,
Subject: Blatant violation of Indian laws on trading and e-commerce by Walmart owned Flipkart- Strict Action required under the law.
1. We are writing to you in pursuance of Flipkart’s staggering violations of the FDI Policy by creatively structuring its marketplace business model and creating a facade in order to exercise control over inventory and retail prices, a practice expressly prohibited by the FDI Policy on e-commerce. In the stories published by prominent media houses, Flipkart’s violations of the FDI Policy are once again brought to the fore and warrants an immediate investigation and strict action from Government of India including tax authorities.
2. Flipkart was acquired by Walmart Inc. in 2018 and the latter holds a 77% stake in Walmart International Holding Company (“WIHC”), the investment vehicle of Walmart Inc. WIHC controls Singapore-based Flipkart Private Limited (“FPL”) and Flipkart Marketplace which in turn own and control Flipkart India (Wholesale business arm of Flipkart in India) and Flipkart Internet Services Pvt Ltd (Flipkart’s India e-commerce Marketplace). Flipkart has always been manipulating the FDI Policy in order to exercise control over inventory and subsequently, prices.
3. Flipkart was founded in 2007 by the Sachin Bansal & Binny Bansal who then started WS Retail, through their close relatives, in 2009. Between 2009 and 2016, WS Retail was Flipkart’s top seller clocking the maximum revenue out of all sellers on the marketplace platform. This was interrupted by the Government of India’s Press Note 3 of 2016 which not only defined “marketplace based model of e-commerce” and “inventory based model of e-commerce” but also added a condition that prohibited more than 25% sales on the e-commerce marketplace by a single vendor. Flipkart, in FY16-17, brought in 9 new companies into the network with each company having investments of not more than [1 crore. It is pertinent to note that these 9 entities, by FY 18-19, had clocked ,27500 crores in revenue. It is mind-boggling to see how new firms that had collective investments of not more than 19 Crores managed to clock revenues amounting to 127500 crores. It is also staggering to note that between FY16 and FY21, the year-on-year revenue kept increasing from merely R1.34 Crore in FY16 to a whopping R44,724 Crore in FY21.
4. Sir, your good office issued Press Note 2 of 2018 to further the objective of the FDI Policy to bring in investments into the country while strictly protecting the livelihoods of small and medium retail merchants/Kirana traders by prohibiting FDI in MRBT and inventory based model of e-commerce and therefore, introduced the condition that every marketplace entity will be deemed to be in control a vendor/seller’s inventory if more than 25% of the purchases of the vendor/seller are from the marketplace entity or any of its group companies. Flipkart, which often claims to protect and facilitate retail business of small merchants and MSMEs, created a façade to violate this very provision of Press Note 2 of 2018.
5. In 2019, Flipkart introduced another level of entities into its business fold (in addition to the already existent sellers) — Authorized Distributors (“ADs”) and this created a two-tier model of business consisting flair of ADs and Diamond Sellers (“DSs”), popularly and rightly known as “preferred sellers”. As of today, Flipkart has 20 DSs and 10 ADs making it an elite group of 30 closely-knit entities created for the sole purpose of granting control of inventory and prices to Flipkart, in a gross violation of the FDI Policy. It is important to note that these entities have been created merely to act as an eye-wash and distract the government from taking note of the wholly illegal activities being undertaken by Flipkart and this elite group.
6. As has been reported by a section of the national media, both these tiers of the business models exist only on paper and for the sole reason of creating incorrect invoices. As has been reported, there is no movement of goods between Flipkart India and these 30 entities — these entities only lend their names for Flipkart to generate invoices to customers. In reality, the movement of goods is between Flipkart India’s Fulfillment Centers directly to the customers. The ADs and DSs exist only for GST compliance and to create a facade that the Flipkart India Marketplace has no control over the inventory and that the inventory is held on by these 30 sellers. A trail is created such that the purchase price for the ADs and DSs is less than the Sale Price of the goods so that, on paper, ADs and DSs incur losses every month. This is “settled” every month through a backdated volume discount letter from Flipkart to these entities. As has been reported, 7 out of the 9 original sellers of the elite group clocked annual revenues to the tune of R37,986 Crore and their balance sheets show that 80% of their revenue is accounted for by their “Flipkart Business”. However, the average profit margin of these sellers was a mere 0.037% establishing thereby, that these entities/sellers exist only to service their arrangement with Flipkart and cede control for a miniscule cost.
7. Sir, we would also like to bring another grave concern to your kind attention. Flipkart is being assisted by a battery of top lawyers and Big Four Consultants who have created a parallel universe and filled that universe with an army if young graduates, chartered accountants, lawyers and business development executives. This army operates under the radar, unofficially, and “manages” the Flipkart business of these 30 entities. This rather complex arrangement is serviced using a web-based system, dozens of unofficial WhatsApp groups and Gmail addresses. The sole purpose of this army is to create, manipulate and maintain an operation setup on paper so as to seem compliant with applicable laws and rules although in reality the group is facilitating grave violations of the FDI Policy. It is important to note that this army is not only facilitating violations of the FDI Policy but also evasion of GST and Income Tax. The purpose to create an unofficial group that operates clandestinely off the books of the companies of the elite group not only raises suspicion into its actions but also warrants an inquiry into money laundering by Flipkart in association with these 30 entities.
8. Sir, the FDI Policy has expressly prohibited FDI in inventory-based model of e-commerce to protect the livelihoods of small merchants and Kirana traders and prohibit control over inventory and prices by foreign e-commerce marketplace entities. Flipkart has created a system of surrogate business partners with the sole aim of bypassing the FDI Policy and destroying the very traders the policy aims to protect. On behalf of over 8 crore traders, we are writing to you to initiate an immediate inquiry and investigation in to the wholly illegal business practice of flipkart and its violations of the FDI policy, GST, Income Tax and more serious money laundering concern, before its wreaks havoc in the lives of our members, their families and over all retail Industry.
Thank You. With regards
National Secretary General
Confederation of All India Traders