Enforcement Directorate sources tell Vicky Nanjappa/Rediff.com that the probe into FDI received by Flipkart continues and a show cause notice will be issued to the online retailer.
Having successfully raised $1 billion in venture capital this week, Flipkart is talk of the town, but some trouble could be brewing for the e-commerce major with the ongoing probe by the Enforcement Directorate.
After the ED began its probe into Flipkart in 2012, the investigation appeared to have meandered. ED sources say this was because there was some confusion regarding the policy on Foreign Direct Investment which is currently being clarified.
An ED official told this correspondent that the Directorate will issue a show cause notice to Flipkart. "There are some formalities regarding the probe and once we have finalised those aspects, the show cause notice will be issued," the ED source said, speaking on condition that he would not be identified by name in this report.
The Enforcement Directorate had sought documents and hard drives from the Bengaluru-based company. The hard drives had been sent for forensic examination, and all the results have not come in yet. "Once we have the data and details obtained from the documents and hard drives, the notice will be issued," the ED officer added.
The ED probe against Flipkart is for alleged violation of the provisions of the Foreign Exchange Management Act, FEMA. The Reserve Bank of India had referred the matter to the ED for investigation.
At the heart of the matter is the confusion over India's FDI policy. In April 2012 the government relaxed rules to allow FDI in e-commerce up to 100%, but only in the b2b (business to business) segment.
In September that year, the government clarified that companies with FDI would not be allowed in the b2c (business to customer) e-commerce space in single and multi-brand retail.
However, at the same time, India permits FDI in the marketplace model -- where third-party vendors sell their wares through the Web site of the e-commerce company.
Following this, in February 2013, Flipkart moved to the marketplace model. The ED probe pertains to the period before Flipkart adopted this new business model.
The ED is probing if Flipkart was operating its business on a B2C e-commerce model during which period it received FDI worth nearly $180 million till 2012.
A show cause notice is, of course, no evidence of any guilt, and Flipkart will be given the chance to explain its actions, after which the ED may decide on its future course of action.
If Flipkart is treated as a multi-brand retail vendor and not an e-commerce store, then it may get away with minimal penalty. However, if the ED can prove that Flipkart had operated in the B2C segment and had been getting funds under the FDI route till 2012, then the penalty could be almost three times the amount it received.
Flipkart, which went online in 2007, received its first FDI tranche in 2009, when Accel Partners invested $1 million. In 2010 it received $10 million from Tiger Global, and $20 million the next year.
In 2012, Naspers, Tiger Global and Accel Partners pumped in $150 million -- taking the total FDI received in the period under the ED lens to $181 million.
In July 2013, Flipkart received a further $200 million from these three investors and Iconiq Capital. Last October it received $160 million from Dragoneer Investment, Morgan Stanley, Sofina, Vulcan Capital and Tiger Global.
In May this year it received $210 million from DST Global and other existing investors.
Before the $1 billion capital infusion this week, Flipkart had already received $751 million over five-and-a-half years since 2009.
Image: Flipkart co-founder and CEO Sachin Bansal. Photograph: Ankitandthakur/Wikimedia Commons.
Disclaimer: Rediff.com also has an e-commerce business which competes in some areas with Flipkart.
