Lessons from ED's crackdown on Byju's, Xiaomi to strengthen compliance

Experts are also of view that severe fines, penalties will push companies and startups to ensure their adherence to the regulatory framework when accepting foreign investments and issuing remittances

On November 21, the Enforcement Directorate (ED) issued a showcause notice of Rs 9,362 crore to Think & Learn, the parent company of edtech giant Byju's, and its founder Byju Raveendran for alleged violations of foreign exchange rules while attracting foreign investments from 2011 to 2023. The central probe agency charged them with contravening foreign exchange provisions, according to an order issued by the adjudicating authority of the Foreign Exchange Management Act (FEMA). This is the second-largest showcause to a unicorn, following a Rs 10,600 crore notice to Flipkart in 2021 for an alleged violation of foreign exchange rules.

Byju’s is among several companies recently receiving notices for violating foreign exchange rules. Xiaomi Technology India Private Limited, along with executives and banks - Citibank, HSBC bank and Deutsche Bank, reportedly faced a similar situation under FEMA.

So, how significant is the FEMA Act, and what impact would the recent penalties have on corporates and startups?

“Any Indian company receiving investment from outside India to issue shares or other securities under a foreign direct investment (FDI) scheme must report all transaction details,” said Rishi Agrawal, chief executive officer and co-founder, TeamLease RegTech, a leading regulatory technology solutions firm.

He noted that the FEMA provisions enable regulators to monitor transactions around foreign investment and identify instances of illicit financial activities. The recent penalties on corporations further underscore the importance of foreign exchange regulations for the nation's monetary and economic policies. “The severe fines and penalties will compel companies to ensure their adherence to the regulatory framework when accepting foreign investments and issuing remittances,” Agrawal added.

Shriram Subramanian, managing director, InGovern Research Services, a leading corporate governance advisory firm, emphasized that companies must take FEMA compliance and ED showcauses seriously. He also stated that regulators need to ensure fairness and efficiency in resolving cases without causing undue delays or burdens for companies.

“The business and investment ecosystem in India remains robust despite these ED notices,” Subramanian remarked.

K Giri, director-general, Empower India, a think tank promoting corporate governance in the country, noted that India continues to be one of the most promising emerging markets globally, attracting global investors due to its opportunities.

“Over-regulatory approaches and scrutiny by investigative bodies create hurdles for non-compliant businesses,” Giri observed. He also highlighted the critical need for businesses to be not only compliant but also local ecosystem-friendly.

FEMA has been in effect since 1999, with the Reserve Bank of India (RBI) as the regulating authority. It oversees the flow of foreign investment into the economy with a stringent regulatory framework. Experts have stated that it plays a pivotal role in aligning India's foreign exchange management practices with global economic trends. Its implementation has facilitated the country's integration into the global economy, promoting ease of doing business, attracting FDI, and providing guidelines around it. The act offers a framework for cross-border trade, investments, and remittances, including acquiring immovable property by non-residents, dealing in foreign exchange derivatives, and establishing special economic zones (SEZs).

Under FEMA, corporations must make mandatory disclosures and filings related to FDI received, issuance of shares, and remittances, among other declarations.

In the case of Byju’s, the ED concluded that the edtech firm and Raveendran allegedly contravened the foreign exchange rules by “failing to submit documents of imports against advance remittances made outside India, by failing to realise proceeds of exports made outside India, by the delayed filing of documents against the foreign direct investment (FDI) received into the company, by failing to file documents against the remittances made by the company outside India, and by failing to allot shares against FDI received into the company,” the ED stated. Byju's had received foreign investment of Rs 28,000 crore between 2011 and 2023, according to the probe agency.

In June, the competent authority appointed under FEMA issued show-cause notices to Xiaomi Technology India, its senior officials, and three foreign banks for alleged violations of foreign exchange rules. The move followed the authority confirming a seizure order of Rs 5,551.27 crore, passed by the ED against the Chinese phone maker in April last year under FEMA provisions, alleging that the company had been illegally remitting money to foreign entities under the guise of royalties.

Those served with show-cause notices reportedly included the company, its director and chief financial officer Sameer B Rao, and former managing director Manu Kumar Jain. The three foreign banks that received notices reportedly included Citibank, HSBC Bank, and Deutsche Bank AG for contravening Section 10(4) and 10(5) of FEMA.

The banks received show-cause notices following directions by the Reserve Bank of India (RBI) for purportedly allowing remittances without conducting due diligence or obtaining any underlying technical collaboration agreement from the company.

What lessons can companies learn from Byju's and Xiaomi to strengthen compliance frameworks? Experts suggest that having a process in place for effectively managing compliance and tracking the ever-changing regulatory landscape is vital.

“Senior management must thoroughly understand the applicable regulations, the disclosures and filings that result from them, and the consequences of non-compliance,” said Agrawal of TeamLease RegTech.

He recommended a checklist of applicable disclosures to enable compliance officers to track ongoing, pending, upcoming, and missed compliances. Periodic audits will help corporations identify gaps in their compliance processes and implement corrective actions.

Experts also noted that technology plays a crucial role in mitigating such risks with smart digital compliance management solutions. These solutions, leveraging web, mobile, cloud, and analytics technologies, simplify compliance by providing smart dashboards, personalized analytics and workflows, and periodic alerts, reminders, and escalations.