BENGALURU: The Directorate of Enforcement (ED), Bengaluru, has filed a complaint against fashion etailer Myntra, and its related entities under the Foreign Exchange Management Act (FEMA), 1999, for allegedly violating foreign investment rules to the tune of Rs 1654,35,08,981 (Rs 1,654.35 crore) under the guise of wholesale trading. The complaint was filed under Section 16(3) of FEMA.
In another case, ED filed a complaint under Section 16(3) of FEMA against Bengaluru-based ‘One Sigma Technologies Pvt Ltd’ (SIMPL) and its director Nithya Nand Sharma, for contravention to the tune of Rs 913,75,88,062 (Rs 913.75 crore). The company is behind the popular Buy Now Pay Later (SIMPL) app, which allows customers to buy now and pay later in instalments.
In an official release on Wednesday, the ED stated that inquiry into Myntra’s books was initiated on the basis of “credible information that Myntra Designs Private Limited (Myntra) and its related companies are doing Multi Brand Retail Trade (MBRT) in the guise of ‘Wholesale Cash & Carry’, allegedly in violation of the extant Foreign Direct Investment (FDI) policy”.
The ED investigation revealed that Myntra had “declared that they were engaged in the business of wholesale cash & carry and invited and received FDI from foreign investors equivalent to Rs 1,654.35 crore, and that they sold a majority of their goods to Vector E-Commerce Pvt Ltd (which sold the goods in retail to the ultimate customer). Vector E-Commerce and Myntra are related parties and belong to the same group or group of companies”.
“Vector was created and continued to be used as a corporate entity to bifurcate the B2C (business to customer i.e Myntra to retail customers) transaction into B2B (Myntra to Vector) and then B2C (Vector to retail customers),” the ED added.
Investigation reveals Rs 1,654 cr FEMA breach, Myntra misused wholesale licence
Investigation also revealed that Flipkart-owned Myntra, which was actually carrying out multi-brand retail trading in the guise of wholesale cash & carry “has not satisfied” the conditions laid down as they have made cent per cent sales to Vector, in contravention of FEMA and Consolidated FDI Policy April 1, 2010, and October 1, 2010, amendments to the tune of Rs 1,654.35 crore. The policies permit only 25per cent sale to companies belonging to the same group or group companies.
A Myntra spokesperson said they are “deeply committed to upholding all applicable laws of the land and operating with the highest standards of compliance and integrity... While we have not received a copy of the subject complaint and supporting documents from the authorities, we remain fully committed to cooperating with them at any point of time”.
‘One Sigma got FDI from US’
In the One Sigma case, the ED stated that the inquiry was initiated on the basis of “credible information that SIMPL has received a substantial amount of Foreign Direct Investment (FDI) from the United States of America (USA), allegedly in violation of the extant FDI Policy”.
The ED investigation under FEMA revealed that One Sigma Technologies “runs its business through a mobile application named SIMPL, which provides buy now pay later services... Further, it was learnt that ‘One Sigma’ received Rs 648,87,76,480 in FDI and issued convertible notes to the tune of Rs 264,88,11,582 under 100 per cent automatic route by declaring its business activity as benefits of Information Technology and other computer service activities”.
The business model and revenue generation model of ‘One Sigma’ were examined, which revealed the company “is into business activities which fall under financial activities. However, as per AP (DIR Series) Circular No 8 dated October 20, 2016, issued by the RBI, FDI in financial activities not regulated by any authority is to be brought under 100 per cent approval route”.
In activities where government approval is necessary for receiving FDI, any startup company can issue convertible notes only with the approval of the Government of India. “However, One Sigma Technologies Pvt Ltd has issued convertible notes without obtaining approval from the GoI. The company received FDI under automatic route and issued convertible notes under automatic route without obtaining prior approval from the GoI, and has thereby contravened .