ED Files Case Against Myntra Over Alleged INR 1,654 Cr FDI Violation

The Directorate of Enforcement (ED) has filed a complaint under the Foreign Exchange Management Act (FEMA) against Flipkart-owned Myntra, its related entities and directors for allegedly flouting foreign investment rules to the tune of INR 1,654.4 Cr.

In a statement, the ED alleged that Myntra and its related companies were undertaking multi-brand retail trade (MBRT) in the guise of ‘wholesale cash & carry’, in violation of India’s FDI policy.

The agency further said that Myntra declared that it was engaged in wholesale cash & carry business, received FDI from foreign investors, and then sold the majority of the goods to its affiliate Vector Ecommerce Pvt Ltd. 

Vector is primarily involved in business-to-business (B2B) transactions within the Myntra ecosystem, specifically handling the wholesale aspects of product distribution to the retail platform.

The ED said that the subsidiary was created and continued to be used as a corporate entity to bifurcate the company’s B2C transition into B2B and then subsequently back to B2C. The agency said that Myntra was actually carrying out MBRT in the guise of wholesale cash & carry.

“Even otherwise, Myntra have not satisfied the condition laid down for “Wholesale/Cash & Carry Trading” as they have made cent per cent sales to Vector Ecommerce, which is in contravention of amendment date 1/4/2010 and 1/10/2010, which permitted only 25% sale to companies belonging to the same group or group companies,” the ED statement read.

Meanwhile, a Myntra spokesperson said that the company is “deeply committed to upholding all applicable laws of the land and operating with the highest standards of compliance and integrity”.

“As a homegrown marketplace, we are committed to contributing to India’s nation-building efforts by empowering the textile and apparel ecosystem through digital commerce… While we have not received a copy of the subject complaint and the supporting documents from the authorities, we remain fully committed to cooperating with them at any point of time,” the spokesperson added.

Dissecting The ED Allegations

The ED alleged that Myntra was acting like a regular retailer selling directly to customers under MBRT but pretended to be a wholesale cash and carry business. It is crucial to understand what this pertains to:

Wholesale Cash & Carry: The idea is that Myntra would buy products in bulk and then sell them to other smaller businesses who then sell to customers. Companies operating under this model can have 100% FDI under the automatic route

MBRT: This is what Myntra is known for generally, that is, it is a fashion-focussed ecommerce platform which sells clothes directly to consumers from different brands. The Centre permits only 51% FDI for this, that too post going through an approval route.

The ED pointed out that even if Myntra was truly a wholesale cash & carry business, it was only allowed to sell a maximum of 25% of its goods to companies that belong to the same group (Vector). Myntra allegedly sold “a majority” of its goods to Vector.

In essence, the Walmart-owned company is alleged to have circumvented the FDI rules. 

This comes at a time when Flipkart is gearing up for its IPO in India, and has moved its domicile back to India as part of its preparations. Meanwhile, Myntra has been on a fundraising spree from its Singapore parent this year. After receiving a fresh capital infusion of INR 709 Cr in February from Flipkart, Myntra further raised INR 1,062 Cr from Singapore parent FK Myntra Holdings in May.

The fashion ecommerce company is currently looking to augment its revenue streams in the competitive fashion ecommerce market. In recent months, Myntra has embarked upon two capital intensive business experiments:

• In May, the company took its ecommerce platform live in Singapore, making it the first international market under Myntra Global. The Flipkart-owned platform is aiming to reach 12% to 15% of the 6.5 Lakh Indians residing in Singapore.
• The company has been experimenting with the quick commerce format of deliveries with its new platform M-Now. After launching the 10-minute delivery option in Bengaluru, Myntra took M-Now live in Mumbai and Delhi in June.