Explained: What is the ED show cause notice to Flipkart all about?

Walmart-owned Flipkart and e-commerce giant Amazon have been under the scanner time and again for alleged violation of regulations under the Foreign Exchange Management Act (FEMA). Now, the Enforcement Directorate (ED), too, has reportedly issued a show cause notice to Flipkart over a case dating back to 2013. Flipkart founders Sachin Bansal and Binny Bansal and investor Tiger Global were also served the notice. A report by news agency Reuters said that the ED has sought an explanation as to why the company and its founders should not be charged a penalty of over Rs 10,000 crore for alleged FEMA violations.

Trade bodies such as the Confederation of All India Traders (CAIT) have repeatedly accused both Flipkart and e-commerce giant Amazon of violating norms. Moneycontrol explains the show cause issued to Flipkart and looks at the way forward for the company.

What is the case all about?

The Reuters report stated, quoting an ED official, that the case was related to an investigation into allegations that Flipkart violated laws after attracting foreign investment. As per the norms, a marketplace is not allowed to hold any inventory of its own after securing investments from foreign firms, but Flipkart related party WS Retail sold goods to consumers through its shopping website.

Flipkart, in a statement, said it is in compliance with Indian laws and regulations, including FDI regulations. “We will cooperate with the authorities as they look at this issue pertaining to the period 2009-2015 as per their notice,” the company added.

What is WS retail?

WS Retail was founded by Sachin and Binny Bansal in 2009 to serve as Flipkart’s in-house vendor. It was responsible for generating a large share of Flipkart’s revenue. The Bansals sold WS Retail to investors after Flipkart moved to a marketplace model. Eventually, in 2018, WS Retail stopped selling products on Flipkart’s platform.

The show cause notice has been issued to both Sachin and Binny Bansal. Sachin Bansal sold his entire stake when US e-commerce giant Walmart acquired 77 per cent of Flipkart in a $16 billion deal in May 2018. Binny Bansal continues to hold a minority stake of 3.85 per cent, as per reports.

Moneycontrol reached out to both Sachin Bansal and Binny Bansal, but is yet to receive a response from either of them.

What else is Flipkart being investigated for?

The show cause notice, which comes with the threat of a hefty fine, comes days after the Karnataka High Court dismissed Amazon’s and Flipkart’s petitions challenging a probe by the Competition Commission of India (CCI). The court had said that the petition was “devoid of merits and substance”, meaning the CCI investigation for alleged anti-competitive practices can continue. Both Flipkart and Amazon have moved the Supreme Court against the Karnataka High Court order, on July 27 and July 28, respectively.

Traders’ body CAIT, which has been seeking action against both the e-commerce companies, called for ED action against Amazon as well. “The notice sent by the ED to Flipkart is a much-awaited step. Both Amazon and Flipkart are conducting a preferential seller system on their respective marketplaces. We demand the ED send a similar notice to Amazon as well, since both Amazon and Flipkart are sailing in the same boat,” CAIT said in a statement.

What next for Flipkart and the Bansals?

Under FEMA, a breach of the norms can attract a penalty that is three times that of the sum involved in such a contravention. The ED Director and Special Director are the adjudication authorities to decide the extent of the penalty. The Reuters report added that Flipkart has 90 days to respond to the notice, which was issued in early July.

Moneycontrol spoke to experts who, on condition of anonymity, said that at this point Flipkart will only have to respond to the show cause notice. As the ED has sought an explanation, Flipkart has an opportunity to prove why it is not in breach of FDI norms and is therefore not liable to be penalised.