The Enforcement Directorate has told Delhi High Court it has started investigations into whether e-commerce giants Amazon and Flipkart had violated the Foreign Exchange Management Act by creating a maze of front companies to circumvent foreign direct investment rules.

Assistant director M.N. Thyagaraj said in a recent affidavit that the ED “has already registered and initiated investigation(s)… against… Respondent No. 2 (Amazon) and Respondent No. 3 (Flipkart) to ascertain” whether they have been “contravening” any Fema provisions.

The response came on a plea moved by an NGO. Telecom Watchdog, through advocate Pranav Sachdeva, had alleged that the e-commerce giants “circumvented” FDI rules “by creating a number of name lending companies”.

Allegation against Flipkart is that through the “name lending companies” that it actually owns, it has been buying branded goods in bulk from manufacturers, rendering small sellers uncompetitive by a wide margin and influencing prices. (Shutterstock)

The allegation against Amazon and Flipkart is that through the “name lending companies” that they actually own, the two have been buying branded goods in bulk from manufacturers, rendering small sellers uncompetitive by a wide margin and influencing prices.

Under FDI rules, e-commerce companies cannot directly sell their products to customers.

The NGO had filed the plea after four complaints to the ED between January and May against the two companies failed to evoke any response from the government.