 "Did Flipkart violate foreign investment rules? ED set to ask details from e-comm website")
It seems like all may not be well in Flipkart’s otherwise rosy world.
The_ Economic Times _ reports that the Indian e-commerce site is being probed by the Enforcement Directorate for alleged violations under the Foreign Exchange Management Act (FEMA). The newspaper quoted a finance ministry official who said Flipkart could receive a show-cause notice for a Rs 1,400 crore violation.
A show cause notice is a court orderthat requires one or more parties to a case to justify, explain, or prove something to the court.
India does not allow foreign direct investment in business-to-consumer retail transactions, but does permit foreign equity in business-to-business transactions. The probe is for the period before April 2013, before Flipkart switched to its current marketplace model, which serves as a platform for online transactions without giving Flipkart any control on inventory. Before this change, Flipkart started as a consignment website, procuring goods from sellers depending on customer demand, and then graduated to the warehouse model before finally making the switch to marketplace.
[caption id=“attachment_76613” align=“alignleft” width=“380”]
Image: Screengrab from Flipkart.com[/caption]
Flipkart’s foreign investors include South African Naspers Group, Accel Partners and Tiger Global.
The company has denied any wrongdoing. In an email reply to_ET,_a Flipkart representative said, “Flipkart is in complete compliance with the laws of the land. We will continue to support the authorities whenever we are approached.”
A 2012 Hindu Business Line article , while first reporting the ED probe, had quoted theDepartment of Industrial Policy and Promotion, which said, “e-commerce in both multi- and single-brand retail is not permissible for companies with FDI.”
At that time, the _Business Standard_reported that several other e-tailers like Myntra, Jabong and Snapdeal were also on the ED’s radar for similar violations.
A Press Information Bureau release, carried by Firstbiz following a written reply in the Lok Sabha by Dr S Jagathrakshakan, Minister of Commerce and Industry in 2012, stated:“Violation of FDI regulations is covered by the penal provisions of the Foreign Exchange Management Act, 1999 (FEMA). The Reserve Bank of India has informed that matters related to…M/s Flipkart Online Services Pvt. Limited, respectively, have been referred to the Directorate of Enforcement for further investigation.”
_ET_clarifies that since this is just a potential show-cause notice, there is no guilt or charges being associated with Flipkart.
_Disclosure: Firstbiz is owned by Network18 that also owns Homeshop18, which competes with Flipkart
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