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India e-commerce faces legal threat

News, 04 December 2015

NEW DELHI: The e-commerce sector in India is flourishing with numerous reports forecasting rapid growth, yet it could face serious trouble if the Delhi High Court upholds a lawsuit moved by traditional bricks-and-mortar retailers.

Following a petition from the All-India Footwear Manufacturers and Retailers Association, the court ordered the Enforcement Directorate, a government agency, to investigate alleged violations of India's rules on foreign direct investment (FDI) by the country's e-commerce firms, including Snapdeal and Myntra.

The Enforcement Directorate has been told to report by December 21 and, if the High Court agrees that FDI rules have been flouted, India's e-commerce players could face a threat to their investment and expansion plans, the Financial Times reported.

A similar lawsuit was filed earlier this year by Retailers Association of India, which represents major chains such as Future Group and Shoppers Stop.

E-commerce groups have been accused of trying to circumvent FDI regulations by calling themselves marketplaces. India does not allow FDI in any B2C e-commerce ventures, although foreign investment is permitted in B2B platforms.

Amazon, Flipkart, Snapdeal and others argue that they are merely technology platforms enabling Indian vendors to sell, but bricks-and-mortar retailers dispute this, saying there are breaches of the Foreign Exchange Management Act.

While the e-commerce groups insist they comply with the law, industry experts have warned that it is open to interpretation and the courts may not agree.

"In terms of what the books of e-commerce companies show, it is very difficult to say they are not a pure technology company," said Anurag Mathur, a partner at PwC India.

"In spirit, though, you could say they are not fully in the spirit of the law," he added. "It will be very, very open for the court to interpret."

Much will be at stake once the Enforcement Directorate reports by the end of the year and the High Court comes to its decision.

Amazon, which had already announced an additional $2bn investment in India, was reported earlier this year to be planning to invest as much as $5bn while Snapdeal, its Indian rival, was said to be raising $500m in investment from Alibaba, the Chinese e-commerce giant.

Data sourced from Financial Times; additional content by Warc staff