ED lodges FEMA complaints against Myntra and Simpl over FDI violations

The Enforcement Directorate (ED) said on Wednesday that it has lodged a formal complaint against online fashion retailer Myntra Designs Private Limited and its affiliated entities under the Foreign Exchange Management Act (FEMA), citing contraventions of foreign direct investment (FDI) to the tune of ₹1,654.35 crore.

According to a communique to the press by the enforcement agency, ED’s Bengaluru zonal office initiated proceedings against Myntra after receiving credible information that Myntra was conducting multi-brand retail trade while operating under the guise of wholesale “cash and carry” trading, which is subject to stricter FDI regulations. 

Upon investigation, it was unearthed that Myntra Designs Private Limited had declared itself as a wholesale, cash-and-carry business to attract FDI. However, it purportedly routed a sizeable portion of its sales to a company called Vector E-Commerce Private Limited, which sold goods directly to retail consumers. The enforcement agency also noted that Vector and Myntra belong to the same corporate group, making the transactions intra-group in nature.

Vector E-Commerce, the ED stated, was essentially set up as a corporate entity to structure B2C (business-to-consumer) sales in a manner that disguised them as B2B (business-to-business) transactions. This structure, the agency argues, allowed Myntra to flout the FDI policy’s retail trading restrictions by routing sales through a group company and ultimately to end consumers.

The complaint further states that Myntra Designs’ business model violated provisions of both the FEMA Act and the Consolidated FDI Policy, specifically amendments made in 2010, which restricted more than 25% of wholesale trading to group companies. ED claims Myntra exceeded this threshold, thereby engaging in unauthorised retail activity under the pretence of wholesale operations.

"In view of the above,” the release concludes, “a complaint u/s 16(3) of FEMA, 1999 is filed before the Adjudicating Authority under FEMA.”

Myntra, in a statement late on Wednesday, said that it has not received a copy of the subject complaint and the supporting documents from the authorities. However, it commits to cooperating with law enforcement authorities. “We remain fully committed to cooperating with them at any point in time,” the statement reads.

BNPL service Simpl slammed with FEMA complaint of ₹913 crore FDI violation

In a separate development, the Bengaluru zonal office of the ED lodged a FEMA complaint against One Sigma Technologies, which operates the buy-now-pay-later service Simpl, for contravention to the tune of ₹913.75 crore, after the enforcement agency received information that the company received a substantial amount of FDI investment from the U.S., allegedly in violation of the extant FDI policy.

Upon investigation, it was revealed that the company received FDI to the tune of ₹648.87 crore and issued convertible notes to the tune of ₹264.88 crore under the 100% automatic route by declaring its business activity as “Benefits of Information Technology and Other Computer Service Activities.” The ED also examined the business model and revenue generation model of One Sigma Technologies, which revealed that the company is involved in business activities that fall under the financial activities category. 

However, as per an RBI circular in 2016, FDI in financial activities not regulated by any authority is to be brought under the 100% approval route. Furthermore, in any activity where government approval is necessary for receiving FDI, any startup company can issue convertible notes only with the government’s approval. Despite the regulation, One Sigma Technologies issued convertible notes without obtaining government approval.

The findings of the investigation has led ED to believe that One Sigma Technologies has received FDI under the automatic route and issued convertible notes under the automatic route without obtaining prior approval from the government, thereby contravening the provisions of FEMA, 1999, to the tune of ₹913.75 crore.