The Enforcement Directorate has found online retail firm Flipkart in violation of FEMA provisions.
Officials involved in the investigation told The Indian Express that “the probe in the matter is over and the ED has been able to establish that the company, which had foreign investors on board, was involved in B2C (business-to-consumer) operations simultaneously during the probe period”, something that is not allowed under the regulations.
“The matter will now be forwarded to the official adjudicator, who will decide the exact amount of penalty. It is likely to be around Rs 1,400 crore,” an official said.
When contacted, a Flipkart spokesperson said, “Flipkart is fully complaint with laws of the land and we will fully cooperate with the authorities.”
As per section 13 of the Foreign Exchange Management Act (FEMA), 1999, if any person or entity were found to be in contravention of the Act, after the process of adjudication, the person or entity could be liable to face a penalty up to thrice the sum involved. The ED is responsible for the implementation of the FEMA.
The official said that the investigating agency has found that WS Retail, a firm incorporated in 2009 to transact with customers, was allegedly acting as a front for retail operations of Flipkart Online Services, incorporated in 2008. The ED investigation had commenced after the RBI had raised the issue.
In 2012, former commerce and industry minister Anand Sharma had informed the Lok Sabha that “the RBI has informed that matters related to Bharti WalMart/Cedar Support Services Ltd and Flipkart Online Services, respectively, have been referred to the Directorate of Enforcement for further investigations”, for allegedly carrying out activities in violation of FEMA.
Following the ED probe, the company had sold WS Retail to a group of Indian investors led by former OnMobile COO Rajiv Kuchhal in February 2013 and moved on to what is called, the marketplace model, in April the same year to conform to the FDI regulations.
As per the current policy, FDI is not allowed in e-commerce companies conducting B2C transactions while 100 per cent FDI is allowed in B2B (business-to-business) transactions. The new government has not taken a call on liberalising the FDI provisions for the sector so far. According to a KPMG-Internet and Mobile Association of India report, India’s e-commerce market in 2013 was around $13 billion.
Last month, Flipkart raised funds worth $1 billion with participation from existing investors Tiger Global Management and Naspers, along with Singapore’s sovereign wealth fund GIC, Accel Partners, DST Global, Iconiq Capital, Morgan Stanley Investment Management and Sofina, to make long-term strategic investments in India, especially in mobile technology.