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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.

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Flipkart will be charged for violations till April 2013.

Also Read: Indian Radio Cab Operators Cry Foul Against Uber, Allege Violating RBI Norms & FEMA

According to FEMA norms, ED has power to slap a penalty upto three times of the foreign investment received, which is likely to be over INR 1000 Cr as penalty.

According to sources close the development, the Adjudicating Officer is analyzing the case to take a finally call on the penalty amount. Once a showcause is issued the company is given the opportunity to contest before the Directorate.

ET states, “The company could also compound the offences by appearing before the RBI and pleading guilty of the contravention. But in most cases of FEMA violations the matter ends up in long protracted litigation.”

“FEMA cases are civil cases to there is no question of criminal proceedings or attachments,” said an official.

Flipkart has raised about $1.8 Bn in funding so far, its investors include Tiger Global, Accel Partners, Naspers,  ICONIQ Capital,  Dragoneer Investment Group, Morgan Stanley Investment Management, Sofina, Vulcan Capital, DST Global and Singapore’s sovereign wealth fund, GIC.

Flipkart is not the only ecommerce company which caught for FEMA violation, earlier in May there were reports that, online fashion and lifetstyle retailer which Flipkart had acquired recently, Myntra was also caught under the Enforcement Directorate’s scanner for possible violation of foreign direct investment (FDI) norms. Though investigations are still in initial stage.

Earlier, ED had also investigated Walmart Stores Inc for a $100 Mn investment into Cedar Support Services that owns Bharti Retail in 2010 by way of compulsorily convertible debentures; though after investigations ED found no violation on Walmart’s part while infusing the funds into Cedar.

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