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Flipkart Guilty Of FEMA Violations, Evidence Found, 1000 Cr Showcause Notice Issued

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Finally, Enforcement Directorate seems to have hit upon hard evidence showing that India’s poster boy E-commerce company, Flipkart, being guilty of violating FEMA (Foreign Exchange Management Act).

According to ET, who have quoted unidentified sources, the violations are in regards to Flipkart’s holding company WS Retail, who had investments from foreign firms.

The current FDI norms do not allow multi brand retail ecommerce companies to sell products online directly to consumers. While, Flipkart currently has a marketplace model, which is legitimate, the violations being slapped on them are for pre-2013 timeline, when they had not pivoted to a marketplace model.

ED Finds Flipkart Flouting FDI Rules; To Slap Rs. 1400 Cr Notice

ET has quoted the sources as saying, “We are aware of the change in their business model. But we will charge Flipkart for violations till 2013.” As per FEMA, if any party has been found guilty of breaking the FDI norms, they can slap a penalty upto 3 times 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 case by case basis and largely depends on the investigator.

If you see the chart below which details out Flipkart’s 8 rounds of funding, they had received approximately 180 million from Tiger Global, Naspers and ICONIQ capital. The latter 2 investment firms could be termed as foreign investors.

Flipkart’s 8 rounds of funding

Round Who Funded Date Amount
First Round Accel India 2009 USD 1 Million
Second Round Tiger Global 2010 USD 10 Million
Third Round Tiger Global June 2011 USD 20 Million
Fourth Round Naspers / ICONIQ Capital August 2012 USD 150 Million
Fifth Round Naspers, Accel Partners, Tiger Global, and ICONIQ Capital July 2013 USD 200 Million
Sixth Round Dragoneer Investment Group, Morgan Stanley Investment Management, Sofina and Vulcan Capital, Tiger Global Oct 2013 USD 160 Million
Seventh Round DST Global May 2014 USD 210 Million
Eighth Round Tiger Global, DST Global, Accel Partners (plus other new investors) July 2014 USD 1000 Million
Total USD 1751 Million

 

This is not the first time, such a report has come out. In May, ET had reported similar news, where they had said that Rs. 1400 crore may be slapped as Fine on Flipkart. Flipkart investigations first started in 2012 when  Anand Sharma, the then commerce & industry minister, informed the Parliament about ED’s scanner on Flipkart.

Flipkart is not the only company who are under ED scanner, even Myntra (and few other top Indian  ecommerce sites) have been under their lens for similar FEMA violations.

Readers should keep in mind that this news is still in rumor stage and there is no official confirmation. Every couple of months such reports come out, however nothing concrete and official has been reported as yet.

So, take this report with a pinch of salt!

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