Enforcement Directorate probing VC-backed Flipkart Online for FDI norms violation

The government is probing venture capital-backed Flipkart Online Services Pvt Ltd for possible violations of FDI norms Minister of State for Commerce and Industry, S Jagathrakshakan, informed the Lok Sabha,  the lower house of Parliament, on Monday. Flipkart Online, which is backed by Naspers, Tiger Global, Accel Partners and Iconiq Capital, is a privately held wholesale retail firm which powers the country's largest e-commerce platform, Flipkart.com.

Currently foreign investment is barred in e-commerce activities and firms have formed multiple corporate entities to legally confirm to the norms. The front end e-commerce website is owned by locals, while the venture capital money flows into a firm which is essentially into wholesale cash and carry business. This separate firm then supplies to the front end retail site as per law.

While multi-brand retailing was not allowed even for offline retailers, the government has recently announced plans to open up the sector with conditions. Large global retailers like Wal-Mart have also entered into similar corporate structures where they partner with local groups that own the front end while a joint venture involving the foreign partner runs the backend as a whole supplier. There were reports earlier that the government has been probing the existing structures used by the world's largest retailer, Wal-Mart, in its Indian venture with Bharti Group.

However, the latest statement reveals the government is also looking at the largest e-commerce business in the country.

As per the statement issued in Parliament, "The Reserve Bank of India has informed that matters related to Bharti Wal-Mart/ Cedar Support Services Limited and Flipkart Online Services Pvt. Limited, respectively, have been referred to the Directorate of Enforcement for further investigation."

An e-mail query sent to Flipkart spokesperson is yet to elicit a formal response and we will update you with an official take on this. The company's founders have maintained in previous public statements that the firm meets existing FDI norms.

Enforcement directorate is a part of Ministry of Finance and is involved in probing violations related to Foreign Exchange Management Act (FEMA) besides cases of money laundering.

Flipkart Online Services recently raised an undisclosed amount in Series D round of funding led by South Africa's Naspers Group besides Iconiq Capital and existing investors Tiger Global and Accel Partners. It is positioned as a wholesale cash and carry retailer which supplies to WS Retail Services Private Limited, a privately held firm which has the license to use the brand Flipkart.com from another entity Flipkart India Pvt Ltd.

Also read:

Devil in the fineprint: India keeps out e-commerce from FDI in multi-brand retail

(Edited by Prem Udayabhanu)