Madras HC to start final hearing in Oct. in ₹23,451-cr. case against Flipkart founders

The ED initiated the proceedings in 2021 for the alleged violation of Foreign Direct Investment policy between 2009 and 2014. The trigger for the petitions was a complaint filed on June 28, 2021

The Madras High Court is all set to commence the final hearing on a batch of writ petitions filed by popular e-commerce platform Flipkart’s founders Sachin Bansal and Binny Bansal in connection with the alleged violation of Foreign Direct Investment (FDI) policy involving a staggering amount of ₹23,451 crore.

Justice M. Dhandapani would hear the petitions filed in 2021 by the co-founders, their foreign investors, and a few others challenging the adjudication proceedings initiated against them by the Directorate of Enforcement (ED) under the Foreign Exchange Management Act (FEMA), 1999.

While a battery of senior counsel, including P.S. Raman and P.H. Arvindh Pandian, are expected to argue for the petitioners who include WS Retail Services Private Limited, Accel India Venture II (Mauritius) Limited, and Lee Jared Fixel of New York; Additional Solicitor-General S.V. Raju would be assisted by ED Special Public Prosecutor N. Ramesh.

Proprietorship concern

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 Bansal. In October 2008, Mr. Sachin Bansal and Mr. Binny Bansal 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.

Rapid growth

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.

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.

Show cause notice

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 penalised.

The notices to Mr. Sachin and Mr. Binny stated that they appear to have contravened the provisions of the FEMA to the extent of ₹23,451 crore and sought an explanation as to why they should not be penalised under Section 13 which provides for imposing a penalty which could be up to thrice the sum involved in the contravention.

Similarly, the notices to the others found contravention to the extent of ₹10,601.95 crore by WS Retail, ₹6,353.76 crore by FPLS, ₹6,353.76 crore by FIPL, ₹142.40 crore by FOL, ₹131.69 crore by Five FK Holdings, ₹131.69 crore by Mr. Fixel, ₹10.70 crore by Accel India Venture II, and ₹10.70 crore by Mr. Mitra and sought explanations from all of them.

Petitioners’ arguments

All 10 show cause noticees had challenged the complaint as well as the notices issued to them before the Madras High Court since the adjudicating authority was stationed in Chennai. The common ground taken by all of them was the long delay between the alleged contravention of the FEMA and the lodging of the complaint. They questioned how the complaint could be lodged in 2021 for the alleged violations between 2009 and 2014.

In his affidavit, Mr. Sachin Bansal said the ED had kickstarted the investigation into the alleged FEMA violations in 2012 itself. He claimed to have actively participated in the inquiry between 2013 and 2015 and provided all necessary documents to prove his innocence. There was a lull after 2015 but the officials had suddenly chosen to file the complaint in 2021 after an inordinate delay, he said.

Pointing out that the Board of FPLS had decided to sell its majority stake in May 2018 and Wal-Mart International Holdings Inc had acquired FPLS in August 2018, Mr. Sachin said he had quit FPLS completely after the acquisition and was now not in possession of the company’s laptops or documents in order to defend himself effectively in the adjudication proceedings. “The impugned (under challenge) notice has now become a cause for undue fear, stress, and anxiety to the petitioner. It is impeding his peace of mind and causing severe damage to his reputation, thereby infringing his fundamental right to life under Article 21 of the Constitution,” Mr. Sachin Bansal’s affidavit read. He also feared that the FEMA proceedings might affect his present involvement with Navi Technologies Private Limited.

Mr. Binny Bansal contended that the FEMA complaint as well as the show cause notices had been issued mechanically and arbitrarily. He said the allegations were baseless and the action initiated by the ED amounted to gross abuse of process of law especially when the FEMA insists on strict timelines for every action. The other writ petitioners too raised similar grounds, besides a few other additional grounds, to quash the complaint as well as the show cause notices.

In its counter-affidavit to the writ petitions, the ED highlighted that the FEMA does not prescribe any time limit for completing the investigation and filing the complaint before the adjudicating authority. The agency also explained that the delay in the present case was because of the need to collect evidence from various countries amid frequent transfer of officers.

It pointed out that the complaint was filed on June 28, 2021, and the show cause notices were issued on July 1, 2021. The ED also contended that the writ petitions against the show cause notices should not be entertained by the High Court since the petitioners would always have the alternative remedy of raising the ground of laches even before the adjudicating authority.

Since all the 10 writ petitioners had filed their rejoinders, too, to the counter-affidavit, thereby completing the pleadings in all respects, Justice Dhandapani on September 25 decided to commence the final hearing on October 23.

Published - September 29, 2024 11:35 pm IST