Flipkart is in the midst of FDI controversy and Businessworld reports that the company’s office was raided by ED (Enforcement Directorate) on November 30th.
“Important documents and computer hard drives were confiscated to be submitted to the cyber forensic department for further investigation..authorities are believed to be readying raids on other e-tailers who received funding while FDI was banned in multi-brand retail.” [source]
Update : Some other sources tell us that the news is false and while the probe is definitely on, there hasn’t been any raid. What’er it is, we certainly believe that activities like these hurt the ecosystem for the lack of clear policies on government’s behalf.
Earlier we reported about Flipkart and Bharti Wal-Mart being probed by the enforcement directorate for allegedly violating the rules laid down by the government pertaining to foreign direct investment in multi brand retail.
The government earlier said that it has received references alleging violation of the FDI policy be certain companies including Bharti Wal-Mart/ Cedar Support Services Limited and Flipkart Online Services.
Violation of FDI regulations is covered by the penal provisions of the Foreign Exchange Management Act, 1999 (FEMA). The Reserve Bank of India has informed that matters related to Bharti Wal-Mart/ Cedar Support Services Limited and M/s Flipkart Online Services Pvt. Limited, respectively, have been referred to the Directorate of Enforcement for further investigation.
Two months ago, the Indian government had allowed up to 51 % Foreign Direct Investment in multi brand retail, paving way for large multi national companies like Amazon and Walmart to set shop in India. Soon after, the government said that e-commerce companies with FDI are not permissible in India.
While this is a common case with most of the ecommerce companies which raised funding from foreign investors, this definitely isn’t a good news for the startup ecosystem as the foreign investor funding is pretty much a gray area when it comes to legal norms.
E-commerce companies which raised millions of dollars from foreign investors were so far operating in a grey area in the absence of clearly articulated government norms specific to e-commerce. The companies set up two entities, one based in India and the other based abroad. The India based entity would be the consumer facing business which bought goods from the foreign entity at arms length pricing. The investments were made into the foreign entity which conducts its “cash and carry” business in India, as allowed by Indian laws. The practice came into question as the FDI in retail debate heated up.