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Flipkart in trouble? Enforcement Directorate to send notice over alleged FEMA breach

Flipkart-logoEnforcement Directorate (ED) is likely to send a show-cause notice alleging violation of Rs 1,400 crore under Foreign Exchange Management Act (FEMA), reports The Economic Times. The agency has been looking into the activities of the e-commerce site since 2012 for possible violation of foreign investment rules.

A source from the ministry told the publication that the directorate now has prima facie evidence that the company flouted the country’s FDI rules. India does not allow FDI in multi-retail e-commerce when selling to customers. Flipkart had sold its front end retail operations WS Retail to a group of investors led by former OnMobile COO Rajiv Kuchhal in February 2013 and had adopted marketplace model in April 2013.

Do read our white paper explaining the Structuring of Foreign Direct Investments In eCommerce in India.

The ED probe is for the period before April 2013, when Flipkart shifted to the marketplace model. There were reports earlier that the directorate raided Flipkart’s offices in late 2012, but that was denied by the company.

ED has the power to impose a fine up to three times the actual investment allegedly made in violation of FDI laws for such violations, but its not clear how much the directorate plans to fine the company. However, it is worth noting that FDIs in India were affected the last time government agencies went in pursuit of companies, such as Vodafone and Nokia over tax issues. The verdicts have not been entirely in government’s favour with those cases and it is not clear if an action against Flipkart will also have such an impact on the market.
Till now Flipkart has raised a total $541 million from five rounds, which includes a reported $150 million funding in August 2012, $20 million in June 2011, $10 million in June 2010 and $1 million in 2009. Flipkart India Pvt. Ltd had reported a loss of Rs 281.7 crore in the year ended March 2013, up from Rs 109.9 crore loss it reported in the previous year, despite a five fold increase in revenue to more than Rs 1,180 crore from Rs 204.8 crore it reported in the previous year.

It competes against other marketplaces such as Snapdeal, Amazon and eBay in India.

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