Amazon India, Flipkart, and Snapdeal Tread Lightly

Merchants say the Web leaders are violating retail laws
Photograph by Kuni Takahasi/Bloomberg

In India, you can’t buy anything directly from Amazon.com. To protect local merchants, the government bars companies that have taken foreign investment from acting as retailers online. Instead, Amazon India functions as an online bazaar, more like EBay or Alibaba. So do the country’s other industry leaders, Flipkart and Snapdeal.com, which are homegrown but have received foreign capital.

Still, small Indian retailers complain that Amazon, Flipkart, and Snapdeal can exercise a level of control over products that breaks the law by limiting choices and organizing flash sales, often compensating chosen merchants who agree to slash prices. For certain products the sites feature items from just a few retailers. Recent sales indicate “some element of control and direct interference in the business of these vendors,” says Praveen Khandelwal, national secretary general for the Confederation of All India Traders, adding that the marketplace model “is just a mask.”

The Finance Ministry is reviewing the findings of lengthy investigations into whether the three e-commerce companies violated rules against foreign investment, says a person familiar with the investigation who wasn’t authorized to discuss it publicly. Flipkart said in an e-mailed statement that it “operates as a marketplace.” Snapdeal Chief Executive Officer Kunal Bahl said in an e-mailed statement that “the right to pricing and product solely lies with these sellers, and we have no role to play.” The ministry and Amazon declined to comment, but in a filing last month with the U.S. Securities and Exchange Commission, Amazon said it faces “substantial uncertainties” regarding its Indian operation. It also said that if the government found Amazon India in violation of “existing or future” laws, it “could be subject to fines and other financial penalties, have licenses revoked, or be forced to shut down entirely.”

Amazon said in July that it plans to spend $2 billion in India; foreign money has also flooded its local rivals. In October, Japanese telecom SoftBank invested $627 million in Snapdeal. In July, Flipkart said it had raised $1 billion from investors including U.S. hedge fund Tiger Global Management, South African media conglomerate Naspers, Singaporean sovereign wealth fund GIC, and Russian venture firm DST Global. At $3 billion, the Indian e-commerce market is 1 percent the size of China’s, but it’s projected to grow tenfold over the next five years, says Ankur Bisen, senior vice president at market researcher Technopak Advisors.

Even India’s traditional mega-retailers, reluctant for years to take on the logistical problems that come with delivering online purchases, can’t ignore the opportunity. Conglomerate Reliance Industries, owned by the country’s richest man, Mukesh Ambani, is quietly testing Internet grocery sales. The Aditya Birla Group, which operates supermarket chains and apparel stores along with telecoms, banks, and mines, is examining online platforms, says its billionaire chairman, Kumar Mangalam Birla. “There’s a lot of ground for new ventures in e-commerce,” he says.

Domestic retail groups say they aren’t being adequately protected from the influence of foreign money. Khandelwal says traditional retailers of electronics, shoes, clothes, and other consumer items lost 45 percent of their business to e-commerce companies during the Diwali festival season in October.

Retailers’ complaints are a problem for Prime Minister Narendra Modi, who took office in May. Although his party counts small shopkeepers among its backers and opposed the previous government’s attempts to ease restrictions on foreign investment, Modi promised during his campaign to make India a more attractive place for foreign businesses. Acting against the likes of Amazon or SoftBank “would send all sorts of signals the government doesn’t want to send,” says Ramanand Mundkur, head of Mundkur Law Partners, an Indian firm that has represented e-commerce companies but not Amazon, Flipkart, or Snapdeal. Kumar Rajagopalan, chief executive officer of the Retailers Association of India, says his group’s 900 members are losing patience. “One can’t afford to have retailers masquerading as marketplaces,” he says. “The rules have to be clarified, and quickly.”

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