Govt refuses to budge on FDI compliance by e-commerce companies

Despite protests by e-marketplaces against the mandatory reporting norms, the government has reiterated that companies like Amazon and Flipkart will have to submit audited reports by September 30 every year. This is to confirm that these firms are in compliance with foreign direct investment (FDI) rules.

Until now, it was only a norm specified by the Centre. This has now been formalised and included in the amended Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, issued on Thursday.  However, the latest changes to the rules exempt companies from submitting audited report to the Reserve Bank of India (RBI), as had been mandated earlier.

According to the notification by the finance ministry, e-commerce companies have to obtain statutory auditor report by September-end for the preceding financial year. Section 15 of the Foreign Exchange Management Act (FEMA) deals with e-commerce entities.

In December 2018, the government had announced tighter FDI norms for e-commerce firms through an informal notification titled ‘Press Note 2, 2018’.  It asked all e-marketplaces to furnish a certificate, along with a report of the statutory auditor, to the RBI by September 30 of every year for the preceding financial year.  However, since the Press Notes are broad guidelines, the decision has been formalised, an official said. Firms had resisted the move, citing that this would raise compliance costs for such companies. Companies had pointed out the absense of a clear format in which the report needs to be given. 

Amazon and Flipkart, the two largest players in the space, were affected the most by the FDI norm change. However, both have now reworked their internal structure to comply with it, industry experts said. 

E-marketplaces had earlier sought an extension to the September 30 deadline for the current year, arguing that it took time to streamline their business and get it further assessed after the latest FDI guidelines took effect in February. 

Commerce department officials, however, had refused to budge. According to sources, e-commerce companies believe the government is using this exercise to take an unauthorised look into their financials, shareholding and operations.