ED probe against e-retailers shows start-up India remains pure hype

Sushma Ramachandran | 21 Jan 2016 12:40 PM
Barely a few days after the much touted Start-Up India initiative was launched, media headlines disclosed that the Enforcement Directorate is probing allegation of foreign exchange rule violations by online retail companies. The probe was apparently begun after a court case filed by a group of brick and mortar firms. It is clear that the agency’s investigations will create hurdles for the very same companies hailed last week as harbingers of a brave new world in e-commerce by a government that was out in full force in Vigyan Bhawan to motivate innovators.

 

The fact is that e-retail companies pose a serious threat to the brick and mortar model but in no country have they been able to replace physical shops. Buying goods online is a tremendous convenience, however, in a country where personal transport costs are high. Plus e-commerce is a boon for many women who are not able to leave their houses for varied reasons merely to shop for household and personal items. In fact, online purchases are booming in smaller towns and metros of this country.

No wonder then that the All India Manufacturers and Retailers Association decided to go to court alleging unfair advantage by e-commerce players. The move is clearly a vain attempt to stop the tidal wave of change in the retail sector in this country. At the same time, the government seems to have leaped into the probe with alacrity. The Enforcement Directorate is a wing of the Finance Ministry that monitors flow of funds from abroad.

In this case, they have found a violation of the Foreign Exchange Management Act (FEMA) by eight of these e-retail companies including Snapdeal, Flipkart, and Jabong. Incidentally, Snapdeal founder Kunal Bahl was among those feted in Vigyan Bhawan along with iconic Uber founder, Travis Kalanick. It was there that Prime Minister Narendra Modi asked how the government could do less to help an industry that has thrived on benign neglect by the state. And yet it is a government agency that is now being pro-active in finding flaws in the functioning of this industry.

The violation allegedly detected is that these firms purchased goods and kept them in stock before selling them. Under the current regulations, e-retailers can only function as a market place for people to buy goods from various companies. This is evidently a difficult technicality as e-commerce companies are bound to keep goods in large demand in stock at some point of time. Warehouses are essential requirements of e-commerce companies globally as goods have to be stocked before delivery.

In fact, if the government really wants to make life easier for e-commerce companies, then the regulations need to change to ensure that stocking goods does not become a violation of FEMA. Instead, it is now all set to send its Babus in to create more problems for these start ups which have been praised globally for their innovation and initiative. Flipkart and Snapdeal began as small online delivery companies but ultimately leapfrogged into billion dollar entities. It should be a matter of pride that these Indian Start-Up firms made it tough for the global giant, Amazon when it finally decided to come here.

Now the question is, was all the hype at the Start-Up event merely an occasion for talking heads to get together. Or does the government seriously intend to promote start-ups that can balloon into new Flipkarts and Snapdeals. If this kind of harassment is being faced by the big firms, small start ups will face many more problems. It is high time the government did some introspection and came up with a brand new policy to ensure the blossoming of a million new start ups rather than trying to nip them in the bud.

 

(The writer is an economic and business journalist. Email: sushma.ramachandran@gmail.com)

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