September 30 deadline for e-commerce compliance won't be extended

The central government will not extend the September 30 deadline for e-commerce marketplaces such as Walmart-backed Flipkart and Amazon to upload on their websites the reports from their auditors that they are complying with Foreign Direct Investment (FDI) rules.

According to sources, some e-commerce firms have asked the  government to extend the date. Arguing that it took time to streamline their business and to get it further assessed after the latest FDI guidelines took effect in February. Commerce department officials, however, have refused to budge.

Another issue raised by the companies is the lack of a clear format in which the report needs to be given.  Amazon and Flipkart, the two largest players in the segment, were affected the most by the FDI norm change. However, both have reworked their internal structure to comply. According to sources, the e-commerce companies believe the government is using this exercise to take an unauthorised look into their financials, shareholding and operations. The commerce department justifies its action by saying many firms have operated with only a thin level of scrutiny from public agencies, due to the holding company being based elsewhere.

The companies have also asked the government to not make public the audited reports; most entities are private limited ones.

“There is no specified format for the (compliance) report but an auditor may be held liable for a wrong report if the company is later found non-compliant. 

One confusion is the period for which Press Note 2 (PN2) has to be complied with, since it came into effect only on February 1. The issue is whether the report is for the months of February-March 2019 or from the date when PN2 was issued,” said Atul Pandey, partner at law firm Khaitan & Co. 

In December 2018, the government had announced tighter FDI guidelines for e-commerce firms through PN2. It directed all e-marketplaces to furnish a certificate, along with a report of statutory auditor, to the Reserve Bank of India  by September 30 of every year for the preceding financial year. This report confirms compliance with the government's guidelines on a list of complex matters.

Among these, companies have had the most difficulty in adhering to the rules that restrict e-commerce marketplaces from controlling inventory. Current rules stipulate that inventory of a vendor will be deemed to be controlled by the e-commerce marketplace if more than 25 per cent of purchases of such vendor are from the marketplace entity or its group companies. 

An entity having equity participation by an e-commerce marketplace entity or its group companies, or having control on its inventory by an e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such a marketplace entity.