Investigations by the Enforcement Directorate into e-commerce poster boy Flipkart have found that the company violated Foreign Exchange Management Act (FEMA) provisions to the tune of around Rs 1,400 crore between 2009 and 2012, a senior ED official told FE. The e-tailer, which came under the scanner for allegedly engaging in business-to-consumer retail even though it had raised money from foreign investors, can be fined anything from 10% to up to three times the violation amount, upon adjudication. Hence, this may translate into a fine of up to Rs 4,200 crore, or it could get away with a relatively light penalty of Rs 140 crore.
The complaint is now with an adjudicating body in Delhi which will issue a show-cause notice that will set into motion a quasi-judicial process. As the process involves further examination of the complaint, it is likely that issuing a show-cause notice will take a few weeks.
“The investigations were completed some months ago and the complaint has been sent to the adjudicating body. Responses may be sought from the investigators if any clarification is needed. Only after that will Flipkart be issued a show-cause notice,” the official said. The notice will allow Flipkart to present its case and evidence before the adjudicating authority.
According to publicly available figures, Flipkart had raised $180 million between its incorporation in 2008 and September 2012 from a clutch of investors like
Accel Partners, Tiger Global, MIH (part of Naspers Group) and Iconiq Capital. All through these years, Flipkart had continued with the inventory-led retailing model through its arm WS Retail.
India’s laws selectively allow with caveats foreign direct investment (FDI) in multi-brand retail, which also includes e-commerce, but they permit FDI in the business-to-business segment. The initiation of the ED probe was revealed in December 2012 by then commerce minister Anand Sharma, who made a statement in Parliament that two alleged FEMA violations relating to Bharti Walmart/Cedar Support Services and Flipkart Online Services had been referred to the agency.
Flipkart has, however, maintained that it did not circumvent or flout any regulation. “Flipkart is fully compliant with the laws of the land and we will fully cooperate with authorities,” a Flipkart spokesperson said.
Flipkart, in February 2013, had sold WS Retail to a group of high net worth individuals led by former OnMobile COO Rajiv Kuchchal. It then switched over to the marketplace model under which it offered a platform for third-party sellers. Since then, Flipkart raised $200 million in July 2013 followed by another round of $160 million in October. In May this year, Flipkart raised $210 million followed by a $1-billion blitzkrieg in July, the highest ever by an Indian e-commerce company. Overall, Flipkart has raised at least $1.7 billion since its inception from marquee investors like Singapore’s GIC, DST Global, Iconiq Capital, Morgan Stanley Investment Management, Sofina, Dragoneer Investment, Vulcan Capital, Tiger Global and Accel Partners.
At the Indian Express Group’s Idea Exchange programme on Thursday, commerce and industry minister Nirmala Sitharaman indicated that the government would crack down on such businesses when she said the same rules that apply to FDI in multi-brand retail apply to e-tail as well — it is to be allowed only in cities with a population of over a million, up to a 51% level, with 30% of sourcing coming from medium, small and micro enterprises, among others.