Laws in India involve ‘unique risks’, and there are more uncertainties over the interpretation of these laws and regulations, Nasdaq-listed Amazon made this disclosure in its recent quarterly filing with the U.S. Securities and Exchange Commission.
Amazon, which commenced operations in India in June, 2013, is making the risk disclosure for the first time on India. It has been making a similar disclosure about China.
The disclosure comes amid reports that the Enforcement Directorate is looking into business models of e-commerce firms such as Amazon and Flipkart. India does not allow foreign direct investment in direct online retail, so Amazon has to operate as a market place. Rather than owning products, they host third-party merchants on their websites, from whom customers buy goods. According to reports, the ED is probing whether Amazon’s fully-owned Indian unit has been circumventing FDI norms. “For www.amazon.in, we provide certain marketing tools and logistics services to third-party sellers to enable them to sell online and deliver to customers. Although we believe these structures and activities comply with existing laws, they involve unique risks,” Amazon said in the quarterly filing. It also stated that it is possible that the government will ultimately take a view contrary to that of the company.
“In addition, our Chinese and Indian businesses and operations may be unable to continue to operate if we or our affiliates are unable to access sufficient funding or in China enforce contractual relationships with respect to management and control of such businesses,” Amazon said. “If our international activities were found to be in violation of any existing or future PRC (the People’s Republic of China), Indian or other laws or regulations or if interpretations of those laws and regulations were to change, our businesses in those countries could be subject to fines and other financial penalties, have licences revoked, or be forced to shut down entirely.”
India has been the fastest country to hit $1 billion sales for Amazon, and the firm is investing $2 billion to up the ante against home-grown rival Flipkart.
“India has been covered as part of our international market segments in the risk factors section of our 10-Q, but this was the first time we called it out explicitly. Given our rapid growth and announcement of substantial investment, we called out India explicitly for the first time this quarter,” Amazon India spokeswoman said in an e-mail response.
Experts say the disclosures point to significant risks in e-commerce business in India, which has been in regulatory spotlight in recent times.
“E-commerce players like Amazon have created complex structures to comply with local laws. However, these structures have recently come under scrutiny of the regulators for potential violation of foreign direct investment (FDI) norms. In light of the above, Amazon may have felt the need to make the said disclosure and avoid concealment of material information,” said Zulfiqar Shivji, International Liaison Partner & Head — Transaction Advisory Services, BDO India LLP.
Ramesh Vaidyanathan, Managing Partner at Advaya Legal, said words ‘unique risks’ and ‘substantial uncertainties’ did raise serious concerns on whether Amazon’s belief that it was legally compliant was bonafide. “The disclosures appear vague insofar as they pertain to the Indian business of Amazon. However, given the sweeping nature of the disclaimer, it is possible that the Indian regulatory agencies seek clarifications on what is intended by the SEC filings. The timing of the disclosure also appears to hint at some contractual structures that may have been put in place recently”.
