CaratLane Challenges ED Notice Alleging FEMA Violations

CaratLane Challenges ED Notice Alleging FEMA Violations

SUMMARY

A show cause notice alleged that CaratLane violated rules between 2011 and 2014 by receiving FDI

The ecommerce startup had secured funding from Tiger Global during this period

CaratLane has approached a former chief justice of India who opined that it was not in violation of FEMA since it applied to the B2B sector and not retail trade

Titan-owned online jewellery startup CaratLane has challenged a show-cause notice (SCN) from the Enforcement Directorate (ED), which alleged that the ecommerce startup violated rules between 2011 and 2014 by receiving foreign direct investment (FDI).

In a notice served on March 28, 2022, ED accused CaratLane of violating the provisions of the Foreign Exchange Management Act (FEMA), ET said in a report. It’s to be noted that between 2011 and 2014, FDI was not allowed in single-brand retail at that time.

Tiger Global invested in CaratLane in 2011, participating in subsequent rounds over the next three years. However, FDI norms prohibited FDI in multi-brand retail trading till 2011, and the level of FDI was capped at 51% in single-brand retail companies. The FDI was introduced to multi-brand retail companies in September 2012, with the prior approval of the erstwhile FIPB and subject to conditions.

CaratLane has approached a former chief justice of India who opined that it was not in violation of FEMA since it applied to the B2B sector and not retail trade. “Based on the legal opinion and assessment of the transactions for the years under consideration, CaratLane management believes no provisioning is required,” according to Titan’s FY23 balance sheet.

The case is before the adjudicating authority, pending orders, ET said, citing sources.

The SCN from the ED predates Titan’s recent investment in CaratLane, which recently raised its stake in CaratLane to 98.28% by acquiring another 27.2% stake from founder Mithun Sacheti and his family for INR 4,621 Cr. The transaction valued CaratLane at nearly $2 Bn (INR 17,000 Cr), placing it in the unicorn category.

Titan is also set to acquire the rest of the equity stake in CaratLane via an ESOP buyback worth INR 340 Cr to INR 380 Cr.

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