Show Cause Notice Proceedings
Flipkart is India’s dominant e-commerce platform started in October 2007 with its headquarters in Bengaluru. Founded by Sachin Bansal and Binny Bansal, the online venture had initially begun as an online bookstore but as the firm’s fame escalated, it grew and expanded its activities. Global retail giant Walmart has paid $16bn or a majority stake in Flipkart, India’s biggest online retailer, making this the world’s largest ever e-commerce acquisition.
The present issue is regarding Flipkart co-founder Sachin Bansal who has moved to the Madras High Court challenging a show-cause notice dated July 1, 2021, issued by the Enforcement Directorate (ED). According to the notice he and another individual were personally responsible for the alleged violation of FDI policy involving a staggering amount of approximately Rs 23,000 crore.
The notice was issued pursuant to an alleged non-compliance with a condition prescribed vide the Consolidated Foreign Direct Investment Policy of 2010 dated April 1, 2010, in respect of issuance of shares of certain Flipkart group companies to foreign investors during 2009-14.
The interim prayer of Flipkart is to stay in its operation. The SCN was issued on the basis of a complaint filed by the Deputy Director of Enforcement in Bengaluru, for instituting adjudication proceedings under Sec.16 of the Foreign Exchange Maintenance Act (FEMA) against the petitioner, another co-founder Binny Bansal of the e-commerce giant, Accel, Tiger Global, Subrata Mitra (nominee director of Accel) and Lee Fixel (nominee director of Tiger Global) on the alleged contravention of the various provisions of the FEMA.
Justice R Mahadevan hearing the writ petition from Bansal on Friday pulled up the authorities for the delay of 12 years in issuing the notice and adjourned the matter by three weeks, after directing the ED and its officials to file the counters. The petition sought to quash the notice as illegal and arbitrary, insofar as he is concerned.
Flipkart response
According to Bansal plea, he ceased to have any association with Flipkart and its group of companies, pursuant to his exit following the acquisition of Flipkart by Walmart International Holding, Inc. in August 17, 2018.
He contended that issuance of the SCN was arbitrary, unreasonable and patently a perverse one, as it was issued after 12 years. The complaint followed an investigation by the Directorate of Enforcement in New Delhi, which commenced in 2012, i.e. 9 years ago. He had proactively participated and cooperated in the investigation undertaken by the ED. And, he had effected bonafide transfers to third parties in the intervening period and had completely exited from the Flipkart group in August 2018. Specifically, there is no statutory period prescribed under FEMA within which the authorities concerned were required to file the complaint about initiating the adjudication proceedings.
Given the substantial lapse of time following the inquiry, the petitioner has conducted himself under the bonafide belief that after due study of the materials obtained during the course of the probe, the ED had concluded that no action was warranted in the matter.
What does Law Says?
In the absence of any period of limitation under the statute, it has been settled by the Supreme Court in various judgments that the Constitution requires every authority, including the ED, to exercise its power to file a complaint within a reasonable time, failing which the actions were taken by the statutory authority will be amenable to the writ jurisdiction of constitutional courts, the petitioner said.
FEMA (Foreign Exchange Management Act) is applicable to the whole of India and equally applicable to the agencies and offices located outside India (which are owned or managed by an Indian Citizen). The head office of FEMA is situated in New Delhi and known as Enforcement Directorate. FEMA is applicable to:
- Foreign exchange.
- Foreign security.
- Exportation of any commodity and/or service from India to a country outside India.
- Importation of any commodity and/or services from outside India.
- Securities as defined under Public Debt Act 1994.
- Purchase, sale and exchange of any kind (i.e. Transfer).
- Banking, financial and insurance services.
- Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more.
- Any citizen of India, residing in the country or outside (NRI).
The Current Account transactions under the FEMA Act has been categorized into three parts which, namely-
- Transactions prohibited by FEMA,
- The transaction requires Central Government’s permission,
- The transaction requires RBI’s permission.
Image: IIT Delhi
