The Legal Issues Amazon Is Facing in India Are
This “price dictation” argument that CAIT has advanced against Amazon and Flipkart is related to their “high-discount” revenue growth strategy, which is both a tax issue and a legal issue. First of all, it should be noted that there are two levels of sales tax: the central tax (which is lower) and the state (which is usually higher). Although the potential of the market is enormous, it is far from easy to navigate. Amazon`s legal problems have only increased since Mr. Bezos` visit in January 2020. But something was wrong: About one in 12 Xessentia shirts was returned in the first quarter of 2016 due to size issues. More than 350 were returned because customers complained they were too small. John Miller is a brand of retail tycoon Kishore Biyani. Amazon and Biyani later became business partners in India, but fell out. Amazon is now embroiled in a legal battle with Biyani over the planned sale of his commercial properties to Reliance, led by billionaire Mukesh Ambani, considered India`s richest man.
Ambani and Amazon are bitter rivals, with the Indian tycoon having launched his own e-commerce business in recent years. The somewhat tense visit reflects the challenges Amazon continues to face in India, including legal disputes, regulatory shifts, and battles with Indian companies for market dominance. But Asia`s third-largest economy is a critical market for U.S. society`s global growth agenda, and it is ready to fight to overcome those obstacles. After the news was announced, SM1 and SM2 exited the company`s platform and the company reduced its stake in both to 24%. In a surprising step given the legality, both then returned to the market. In August this year, it was announced that Catamaran and Amazon would end their relationship in Q1 2022 and Cloudtail would cease operations. In another intriguing move, the company contacted regulators on December 22, asking for permission to buy prions, informing regulators that Prione will continue to operate (i.e. sell products on the market) until regulatory approval. Again, the law clearly states that companies like Amazon and Flipkart can only act as marketplaces and do not own a seller. Disclaimer: The next two subsections are comprehensive in-depth dives into legal analysis for each company. This is an important consideration for “India observers,” but other readers can skip to the next section, titled “Historical Taxation.” As can be clearly seen, the company has burned money in many legal disputes with various courts and arbitration systems in India and Singapore.
In FY18 and FY19, the company`s audited financial statements to the Indian Business Register totaled approximately $285 million for “professional legal services.” News surfaced in September that documents filed with the commercial registry show that the total amount of legal fees paid between FY18 and FY20 was $1.2 billion, bringing the FY20 amount to about $921 million, more than India`s largest law firm earns in a year with a comprehensive client list. Two people working closely with Amazon`s in-house legal team told the statement that the company`s senior legal counsel, Rahul Sundaram, had been placed on leave. He responded to the publication`s request for comment by saying, “I`m sorry I can`t speak to the press.” The company quickly denied that this was the case, saying that only $7.3 million was legal fees, while the rest was paid to professional consultants: customer research, advertising, marketing, etc. This was refuted by a number of legal and accounting professionals, as many of them were separate positions that had already been filled. CAIT litigator had access to audited statements filed with the government, revealing that the total legal and consulting costs for fiscal years 18 to 2020 were $740 million. The company`s lawyer was put on leave when a whistleblower told authorities that lawyers` fees paid were being used to bribe civil servants. This is not just a crime in India; This is a violation of the United States. Foreign Corrupt Practices Act. The penalty in both countries is imprisonment: up to 7 years in India and 20 years in the United States. Note: Reporting to Sea Limited (SE) mentioned that the company`s Shoppee platform is coming to India.
CAIT has previously investigated the parent company`s India-centric structure, listing specific violations of FDI standards and highlighting its ties to a Chinese tech company banned in India (which would likely be a reporting issue) in its December 16 application to the Ministry of Finance requesting action against the company. Amazon India was recently accused of corruption by an Indian publication, The Morning Context. According to the report, Amazon had launched an investigation into the conduct of its legal representatives in India. Three people who were aware of the developments told the publication. The development follows a whistleblower complaint alleging that a certain amount paid by Amazon in legal fees was used by one or more of its legal representatives to pay bribes. As mentioned earlier, government actions in the past have indicated significant bonhomie and support for Amazon`s efforts in India. But now, with the leaked documents, whistleblowers and suspicious legal maneuvers of the company, it is very likely that the various investigative units of the Republic are currently digging deep. Warning: This article is a “long read” hybrid: there is an in-depth legal analysis and regulations affecting Amazon and Flipkart, which is of particular interest to “India watchers”, i.e. the growing class of foreign investors and institutional investment specialists who want to focus on India-specific investments and understand the landscape. Both groups have made steady progress in “proving their claims” in the legal system. In FY18 and FY19, immediately following the Walmart acquisition, the company spent nearly $90 million on “legal professional services.” The antitrust investigation against Flipkart had been dismissed by another court before the CAIT filed a motion to reopen the case. Flipkart is represented in the present proceedings by Mr Harish Salve.
There are important caveats: the law does not allow FDI in e-commerce businesses that sell directly to customers. Amazon and Flipkart are welcome (and called “marketplaces” in legalese) because they connect sellers and buyers. However, marketplaces are not allowed to control the prices of sellers` products, including discounts. The welcome mat at Amazon was publicly confirmed when the Prime Minister of the Republic warmly met with current Executive Chairman Bezos on behalf of the US-India Business Council in 2016 and presented him with the Global Leadership Award. These issues are relatively minor compared to the end of last year: the cartel court ordered an investigative unit to conduct an investigation into the platform, based on a complaint from AIOVA that the platform is abusing its dominant position online. The court found enough evidence to prosecute the company. There is some support for the idea that Amazon and Flipkart tend to “lead each other” in their plans in India during their long-standing competition. The “big discount” growth strategy pursued by both platforms to enable rapid sales growth may have intensified to the point where sellers were forced to accept discounts at their expense, as CAIT and AIOVA claim. For the record, both litigants seem very confident about their evidence and have offered it to virtually every regulator, court and investigative unit in the Republic.
Given the long list of problems and alleged violations, it is highly unlikely that there will be “business as usual” for these specific foreign players in India. In August this year, the country`s Supreme Court rejected Amazon and Flipkart`s request to scrap antitrust investigations against them and ordered the investigative unit to proceed. Amazon employees took a “deep dive,” according to the 2016 document, sifting through Amazon.in-per-year data, including customer complaints and return numbers for Xessentia, Arrow and seven other brands. They found that a men`s business shirt brand in India called John Miller vastly outperformed Xessentia shirts, even though they had a “similar” average selling price. John Miller also had about half of the customer feedback for “quality issues.” The predominant litigator against Flipkart and Amazon in the republic`s legal system was the Confederation of All Traders of India (CAIT), founded in 1990 and representing the interests of 80 million traders in a rapidly changing republic. The association is well organized and has gathered a lot of information in recent years that indicates “misconduct” on the part of foreign e-commerce companies. Amazon, like Walmart`s Flipkart, operates a marketplace business in India due to local regulatory requirements. It faces a host of other regulatory impulses in the South Asian market. Marketplaces cannot have a majority stake in sellers on their platform. Amazon and Flipkart have reduced their shares in their biggest sellers. Amazon had a majority stake in Cloudtail and Appario, but reduced it to 24%.
Recent reports on Amazon have raised several issues related to the company`s governance and operational structure. The facts arising from the company`s activities in India, completely ignored by the financial media of its home headquarters, greatly support this thesis. The consequences of its actions could diminish investment in a “growing market”, but the financial impact on the company`s revenues would be limited in the short term and, interestingly, significantly positive.