Startup Originals Team
India’s e-commerce sector is under the spotlight once again as the Enforcement Directorate (ED) launches a probe into Myntra, one of the country’s leading online fashion retailers. The agency has filed a formal complaint against Myntra Designs Pvt. Ltd., citing violations of Foreign Exchange Management Act (FEMA) regulations related to foreign direct investment (FDI) worth ₹1,654.35 crore.
Background: Why Myntra Is Under Investigation
The complaint comes after an extensive investigation by the ED’s Bengaluru office. Myntra, owned by Walmart-backed Flipkart, allegedly sidestepped India’s strict FDI rules for multi-brand retail by using a complex corporate structure. The investigation specifically points to violations under Section 16(3) of FEMA and related provisions of India’s Consolidated FDI Policy.
How the Alleged Violation Occurred:
The Corporate Structure at the Center of the Case:
According to the ED, Myntra received large sums of foreign investment under the pretense of operating as a wholesale business. Indian FDI regulations permit foreign investment in wholesale and “cash-and-carry” operations, but they strictly limit sales to group companies: no more than 25% of total sales can go to related entities within the same corporate group.
ED alleges Myntra set up an arrangement where almost all sales were made to Vector E-Commerce Pvt. Ltd., a related group entity. From there, goods were passed directly to end consumers, essentially converting what should be business-to-business (B2B) operations into business-to-consumer (B2C) transactions. This structure, as per the agency, was deliberately established to circumvent India’s bar on foreign-funded multi-brand retail trading (MBRT).
Details of the FEMA Violation:
The ED highlighted that under policy amendments introduced in 2010, wholesale entities are allowed to sell only up to 25% of their goods to group companies. In Myntra’s case, however, investigators found that “100% of goods were routed to a related entity,” significantly breaching the permissible limit. The transactions-worth ₹1,654.35 crore-are alleged to have masked their true retail nature by passing through an intermediary.
Legal Implications and Next Steps:
Based on their findings, the ED has lodged the case under Section 6(3)(b) of FEMA, citing breaches of FDI policy restrictions. The complaint has been forwarded to a FEMA Adjudicating Authority, which will oversee subsequent proceedings. This move signals increased regulatory scrutiny of e-commerce businesses, especially those with complicated corporate chains meant to obscure direct retailing funded by foreign money.
Myntra’s Response:
In response to the ED’s complaint, Myntra asserted it has not yet received any official notice or documentation related to the investigation. The company reiterated its commitment to complying with Indian laws and maintaining high standards of integrity and regulatory compliance. Describing itself as a “homegrown marketplace,” Myntra emphasized its contribution to India’s fashion, textile, and e-commerce landscape and affirmed its willingness to cooperate fully with authorities during the process.
Conclusion:
This case highlights the challenges and evolving regulatory landscape facing India’s fast-growing e-commerce sector. As authorities clamp down on potential circumvention of FDI rules, the outcome of this investigation could have significant ramifications for how online retailers structure their operations and engage with foreign investors.
