The Enforcement Directorate has prima-facie evidence that Flipkart has flouted Foreign Investment rules and has allegedly breached FEMA (Foreign Exchange Management Act) guidelines. They are planning send a show cause notice alleging this violation in tune of Rs. 1400 crores, reports ET citing a senior Finance Ministry official.
Flipkart has been under ED’s scanner for some time now. In 2012, the commerce ministry had told Lok Sabha that Flipkart was possibly violating the foreign investment rules.
As per the Indian rules, FDI is not allowed on multi-retail ecommerce model where the company themselves sell the goods. However, FDI is allowed in marketplace model, where third party sellers are involved and ecommerce company themselves do not sell the goods directly.
In April 2013, Flipkart changed their model to a full fledged marketplace by selling their front-end business WS Retail to a group of investors. In all probability this was done to ensure that they are complying completely with all the FDI rules and regulations.
However, ED’s investigation has been going on before they converted into marketplace model, which could provide evidence that they flouted the FDI rule before April 2013.
The Enforcement Directorate has power to impose upto 3 times the amount of investment made into the company. However, maximum fines are rarely imposed and they are calculated on case by case basis and largely depends on the investigator. In this case, ED is expected to slap a fine of Rs. 1400 crore (around USD 223 million).
Flipkart till date has raised a total of USD 541 million from various investors since 2009. Here is the stage wise investment:
| 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 |
Though ED is planning to send the notice to Flipkart, it does not mean that they are guilty. Flipkart will have right to explain its position and according to Flipkart’s spokesperson reply to ET, ”Flipkart is in complete compliance with the laws of the land. We will continue to support the authorities whenever we are approached,”.
We will wait and watch further developments to see where it goes!