ED slaps Rs 10,600-crore notice on Flipkart for forex violations

The Enforcement Directorate (ED) has slapped its biggest FEMA show-cause notice of Rs 10,600 crore on Sachin Bansal and Binny Bansal-founded Flipkart and nine other entities/ individuals linked to the e-commerce major for allegedly flouting foreign exchange rules. 

The central probe agency has charged these entities by an order issued in July by the adjudicating authority of the Foreign Exchange Management Act (FEMA).

The violations are in relation to Flipkart and its other holding firms, including one in Singapore, which had investment from foreign firms between 2009 and 2015. The company was found to have breached various forex provisions including one dealing with “transfer and issue of security to the person outside India”, a source said.

In 2018, Flipkart was acquired by Walmart in a $16-billion deal.  

A Flipkart spokesperson said the company was in compliance with Indian laws including regulations on foreign direct investment (FDI). ‘’We will cooperate with the authorities as they look at this issue pertaining to the period 2009-15 as per their notice,’’ the spokesperson said.  

The FEMA show cause notice has been issued after completion of an ongoing investigation and under various sections of the forex law, an official privy to the development said. 

According to the official, legal proceedings have begun. Entities who have been served show cause will be called for personal hearing in the matter. The authority typically decides the penal action after hearing from the investigator and the company concerned. 

IN A SPOT

• Show-cause notice issued to total 10 entities, including Flipkart Private Ltd
• It alleges these entities breached various forex norms, including the one on ‘transfer and issue of security to the person outside India’
• The adjudicating authority will decide penal action against them
• FEMA contravention penalty could go up to 3 times of the investment received 
• ED started investigating the matter in 2012

The probe reflects discrepancies in Flipkart’s structuring operations, according to the official. ‘’The company was found to have indulged in multi-brand retailing while it claimed it was engaged in wholesale trading activities,’’ he said.

The current FDI norms do not allow multi brand retail where companies can sell directly to consumers.  Flipkart currently has a marketplace model, which is permitted for foreign-owned companies.

According to FEMA rules, if any party has been found guilty of breaching the forex norms, they can be slapped a penalty that’s thrice the contravention or for foreign investments received by the company (Flipkart in this case). However, maximum fines are rarely imposed and they are calculated on a case by case basis and largely depends on the investigator.

The ED action has come at a time when Flipkart is working towards an initial public offering (IPO). Besides Flipkart, some other e-commerce firms have also been under the ED lens for similar forex violations. Investigations into Flipkart date back to 2012 and the matter even came up in Parliament.

Earlier this year, the commerce ministry had written to FEMA authorities including Reserve Bank of India and the federal agency seeking "necessary action” after trader bodies alleged violation of forex and FDI rules by e-commerce players. The complaints pertained to alleged violation of the FDI policy in a deal between Flipkart and Aditya Birla Fashion and Retail as well as breach of foreign investment rules by e-commerce firms.