The good days for the India’s ecommerce poster boys seems to be over now, as soon Enforcement of Directorate is going to slap a showcause notice of FEMA violation against Flipkart after two years of probe. According to reports, during investigation ED has found evidences of FEMA violation by the ecommerce player as WS Retail, the holding company that had investments from companies overseas. ED is likely to show-cause the company over INR 1000 Cr as penalty.
The investigation dates back to 2012 when in a press note, the government said, that it has received references alleging violation of the FDI policy by certain companies including Flipkart Online Services. The note mentions:
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 Bharti Wal-Mart/ Cedar Support Services Limited and M/s Flipkart Online Services Pvt. Limited, respectively, have been referred to the Directorate of Enforcement for further investigation.
There were also reports of raids at Flipkart office in 2012 after the probe had begun.
The agency had completed its investigation against Flipkart a few months back and now it is the process of issuing notices.
The current FDI norms in India do not allow FDI in ecommerce in B2C model while 100% FDI is allowed in the business-to-business (B2B) category. In simple terms, Foreign direct investment (FDI) is not allowed in ecommerce companies that sell directly to customer, though it is allowed in portals that act as a platform for vendors to showcase and sell their products, this is the type of model which Flipkart currently follows i.e. Marketplace model which it had switched to in 2013.
Flipkart had sold its front end retail operations WS Retail to a group of investors led by Rajiv Kuchhal in February 2013 before adopting marketplace model in April 2013.