FEMA case against Flipkart founders: Madras HC dismisses cases filed by Sachin and Binny Bansal

The Madras High Court has dismissed a batch of writ petitions filed by popular e-commerce platform Flipkart’s founders Sachin Bansal and Binny Bansal and a few others in connection with an alleged violation of the Foreign Direct Investment (FDI) policy involving ₹23,451 crore.

Justice S. Sounthar rejected all the writ petitions pending since 2021, with liberty to the petitioners to submit their explanations within 30 days from the receipt of his order to the show cause notices issued to them by the Special Director of the Directorate of Enforcement (ED) in Chennai.

The judge agreed with Additional Solicitor General S.V. Raju and ED Special Public Prosecutor N. Ramesh that the petitioners ought not to have rushed to the High Court without submitting their explanation to the notices issued by the Special Director, who was the adjudicating authority under the Foreign Exchange Management Act (FEMA) of 1999.

Making it clear that the petitioners would be entitled to raise all grounds in their defence before the adjudicating authority, the judge ordered that the officer concerned should consider the explanations, if any, filed by the petitioners within the stipulated time, strictly in accordance with law.

The judge pointed out that the show cause notices had been issued seeking an explanation as to why adjudicatory proceedings should not be initiated against the petitioners. Therefore, only after the receipt of the explanation, the officer would decide whether such proceedings, under Section 16 of FEMA, should be initiated or not.

If a decision was taken to go ahead with the adjudication process, the petitioners would have to be given a reasonable opportunity to put forth their case before passing final orders under Section 16. Any such order passed by the adjudicating authority could be questioned by filing an appeal before the special tribunal for FEMA cases.

The orders passed by the tribunal could be challenged further by filing a second appeal before the High Court under Section 35 of FEMA. Such an appeal remedy provided under the Act, by no stretch of imagination, could be termed as an ineffective remedy in order to entertain the present writ petitions, Justice Sounthar added.

Background of the case

The trigger for the writ petitions, pending in the High Court for the last three years, was a complaint filed by a Deputy Director of Enforcement in Bengaluru on June 28, 2021. The complaint was lodged with the Special Director of Enforcement (the adjudicating authority) in Chennai under Section 16(3) of the FEMA.

According to the complainant Rahul Sinha, M/s. Flipkart.com was started as a proprietorship concern owned by Sat Prakash Agarwal, father of Mr. Sachin. In October 2008, Mr. Sachin and Mr. Binny co-founded Flipkart Online Services Private Limited (FOL), which was incorporated under the Companies Act.

FOL was declared a company engaged in “cash and carry wholesale distribution of books, periodicals and other publications and providing technology services to facilitate sale of books through the Internet.” However, it sold 100% of the goods only to WS Retail, which was also jointly owned by the two business partners.

The modality was adopted because FDI was not permitted in the retail sector. Therefore, Mr. Sachin and Mr. Binny had transferred the equity shares of FOL to foreign investors but made sure that they sold 100% of the goods to WS Retail which, in turn, sold those goods in retail through the Flipkart website, the complainant claimed.

In October 2011, the two business partners incorporated Flipkart Pte Limited in Singapore (FPLS) for wholesale distribution of several kinds of goods and commodities without restricting them to books and periodicals, as was done by FOL. The FPLS had multiple wholly owned subsidiaries in Singapore, the United States, and India.

The company grew rapidly and attracted ₹1,352.97 crore between October 21, 2011, and October 4, 2013, and another ₹5,000.79 crore between October 4, 2013, and December 26, 2014, from various investors based in the United States, the Netherlands, Mauritius, and other countries.

The subsidiaries of FPLS in India included Flipkart India Private Limited (FIPL), to which FOL’s entire business was transferred on a slump sale basis in 2011. Thereafter, FIPL continued to sell 99% of its goods to WS Retail, which, in turn, sold them to retail customers through Flipkart, the complainant said.

Centre’s regulation

In the meantime, the Centre had come up with a regulation that companies involved in cash and carry wholesale should not sell more than 25% of their goods to group companies with effect from April 1, 2010. The regulation also stated that even those 25% of the goods should only be for the internal use.

The restriction related to internal consumption was removed with effect from October 1, 2010, but the regulation which stated that the trade to a group company should not exceed 25% of the annual turnover of the wholesale venture continued to remain in force, the complainant told the adjudicating authority.

He said that to circumvent the regulation, Mr. Sachin and Mr. Binny had sold their shares in WS Retail to their close relatives and employees in February 2011 in an attempt to establish as if it were not a group company. However, the relatives played no active role in the administration of the company, he claimed.

“WS Retail had been used to bifurcate the B2C (Business to Consumer i.e., from FOL/FIPL to retail customers) transactions into B2B (Business to Business i.e., from FOL/FIPL to WS Retail) and then B2C (i.e., from WS Retail to retail customers). There is evidence to prove that WS Retail is only a dummy company,” the complaint read.

Pursuant to the complaint, the Special Director of the ED issued show cause notices to the two business partners, FOL, FPLS, FIPL, Accel India Ventures, its nominee director Subrata Mitra, Tiger Global Five FK Holdings, its nominee director Mr. Fixel and WS Retail on July 1, 2021, seeking an explanation as to why they should not be proceeded against.

The recipients of the show cause notices had filed a batch of 11 writ petitions in the Madras High Court challenging the complaint lodged by the Deputy Director as well as the subsequent show cause notices issued by the Special Director.