ED files FEMA case against Myntra for Rs 1,654 crore FDI violation

The Directorate of Enforcement (ED), Bengaluru Zonal Office, has filed a case against Myntra Designs Private Limited and its associated entities and directors under Section 16(3) of the Foreign Exchange Management Act, 1999 (FEMA). The case accuses contravention of nearly Rs 1,654.35 crore, allegedly for violating the FDI policy by carrying out Multi-Brand Retail Trade (MBRT) in the name of Wholesale Cash & Carry.

It was investigated by the Enforcement Directorate (ED) under the Foreign Exchange Management Act (FEMA), 1999, that Myntra Designs Pvt. Ltd. had misrepresented itself as carrying out wholesale cash and carry business. 

The company had attracted foreign direct investment (FDI) of Rs 1,654.35 crore from foreign investors, allegedly for this business. It came to light that Myntra was selling its products mostly to Vector E-Commerce Pvt. Ltd., which would then sell to retail customers. Importantly, Vector E-Commerce Pvt. Ltd. and Myntra Designs Pvt. Ltd. are connected parties of the same group or group of companies.

The probe found that Vector E-Commerce Pvt. Ltd. was utilised as a corporate entity to fragment business-to-consumer (B2C) transactions into business-to-business (B2B) and subsequently B2C transactions. 

Myntra Designs Pvt. Ltd. would sell to Vector E-Commerce Pvt. Ltd., who in turn would retail to customers. The ED probe discovered that Myntra Designs Pvt. Ltd. was essentially carrying on multi-brand retail trading under the guise of wholesale cash and carry. 

Myntra Designs Pvt. Ltd. did not satisfy the criteria for wholesale/cash and carry trading since it sold 100 per cent of its turnover to Vector E-Commerce Pvt. Ltd., a related entity. 

This goes against the April 1, 2010, amendments and the October 1, 2010, amendments, where only 25 per cent of the sales were to be made to group companies or companies of the same group.

Myntra Designs Pvt. Ltd. and others have reportedly violated Section 6(3)(b) of the Foreign Exchange Management Act, 1999, and the Consolidated FDI Policy issued on April 1, 2010, and October 1, 2010, to the extent of Rs 1,654.35 crore. Therefore, the Enforcement Directorate filed a complaint under Section 16(3) of FEMA, 1999, before the Adjudicating Authority.

On the basis of credible information that Myntra and its group of companies were allegedly indulging in multi-brand retail trading (MBRT) while purporting to be carrying on business as a wholesale cash and carry operation, the ED initiated its probe, as per an official statement.

The arrangement is directly contravening India’s Foreign Direct Investment (FDI) policy, the ED stated.

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