ED Launches Investigation into Myntra’s FDI Practices

The Enforcement Directorate (ED) has initiated an investigation against Myntra, a prominent Indian fashion e-commerce company, along with its associated entities and directors. The probe focuses on alleged violations of Foreign Direct Investment (FDI) regulations amounting to Rs 1,654.35 crore. The case was registered at the ED’s Bengaluru Zonal Office following credible inputs that suggested Myntra Designs Pvt. Ltd. and its related companies were engaged in Multi-Brand Retail Trading (MBRT) while claiming to operate under a ‘Wholesale Cash & Carry’ model, which contravenes India’s FDI policy.

Allegations of Misrepresentation in Business Model

The investigation revealed that Myntra received substantial FDI under the guise of operating a wholesale business. However, it was discovered that a significant portion of the goods was sold exclusively to M/s Vector E-Commerce Pvt. Ltd., a related entity within the same corporate group. This company then retailed the products to end consumers. According to the ED, this structure was intentionally designed to transform direct Business-to-Consumer (B2C) transactions into a Business-to-Business (B2B) arrangement between Myntra and Vector, followed by a B2C model between Vector and retail consumers. This setup effectively circumvented the restrictions on multi-brand retail under FDI norms.

Violation of FDI Policy Amendments

Under the FDI policy amendments effective from April 1, 2010, and October 1, 2010, companies operating under the wholesale model are permitted to sell only up to 25% of their goods to related group companies. However, Myntra allegedly breached this limit by making 100% of its sales to Vector E-Commerce. The ED concluded that Myntra Designs Pvt. Ltd. and others violated section 6(3)(b) of FEMA, 1999, along with relevant provisions of the Consolidated FDI Policy.

Legal Proceedings and Industry Implications

Based on these findings, a complaint has been filed under Section 16(3) of FEMA for further legal action. As of now, there has been no immediate response from Myntra regarding these allegations. The registration of this case underscores the increasing regulatory scrutiny in the e-commerce sector concerning compliance with FDI norms.