Myntra, Simpl Under ED Probe for ₹2,500 Cr FEMA Breach: FDI Rules, BNPL Loopholes Under Scrutiny -

Myntra, Simpl Under ED Probe for ₹2,500 Cr FEMA Breach: FDI Rules, BNPL Loopholes Under Scrutiny

The Foreign Exchange Management Act, 1999 (FEMA) governs foreign exchange transactions and foreign direct investment (FDI) in India. FEMA includes provisions such as Section 6, Section 13, and Section 16(3) that regulate inflows and outflows of capital, prohibit misclassification of business models, and stipulate approval mechanisms for specific industries. In particular:

Wholesale “cash-and-carry” operations fall under the automatic route for FDI (allowing 100% inbound foreign investment).
Multi‑brand retail trading (MBRT), on the other hand, is capped and restricted FDI in this area requires government approvals and is subject to a 51% investment cap in most cases.

Breaches occur when businesses misstate their operations to circumvent stricter FDI rules or issue convertibles without approval, potentially triggering FEMA enforcement.

Myntra: Alleged Misuse of Wholesale Structure to Evade Retail FDI Limits

On July 23, 2025, the Enforcement Directorate’s Bengaluru zone filed a formal FEMA complaint under Section 16(3) against Myntra Designs Private Limited, its directors, and related entities for alleged violations amounting to approximately ₹1,654.35 crore.

What the ED alleges:

Myntra declared itself as a “cash-and-carry wholesale” business to attract full FDI under the automatic route.
Most goods sold were routed to Vector E-Commerce Pvt. Ltd., a related-party entity in the same corporate group.
Vector then sold to consumers, effectively making the arrangement multi-brand retail trade disguised as wholesale a breach of FDI policy that limits wholesale-group sales to 25%, but Myntra allegedly routed 100% of its sales via Vector.

Myntra has responded by stating it has not yet received a copy of the complaint and pledged full cooperation with the authorities.

The ED’s investigation focuses on whether this sales structure was a deliberate strategy to bypass FDI caps in retail and whether that constituted contravention of FEMA provisions.

SIMPL (One Sigma Technologies): Unapproved Financial Activity & Convertible Notes

The day after filing against Myntra, on July 24, 2025, the ED lodged another FEMA complaint this time against One Sigma Technologies Pvt. Ltd., the operator of the Simpl Buy‑Now‑Pay‑Later (BNPL) platform for alleged violations amounting to approximately ₹913.75 crore.

Key allegations:

Simpl reportedly received FDI worth ₹648.87 crore and issued convertible notes worth ₹264.88 crore, both under the 100% automatic route, classifying its business as “IT and computer services” to qualify.
The ED found that Simpl’s core business is financial services specifically buy‑now‑pay‑later lending which is subject to stricter FDI norms and requires prior government approval, especially under RBI’s 2016 circular categorizing such activities as financial, not IT services.

Simpl is accused of violating FEMA by accepting foreign capital and issuing convertible notes without the requisite government nod, a move considered a serious regulatory breach under Sections 13 and 16 of FEMA. Broader Implications: Regulatory Scrutiny of Retail and Fintech Models

The dual complaints against Myntra and Simpl reflect a growing trend of regulatory scrutiny in e‑commerce and financial‑technology sectors:

Companies with complex corporate structures many overlapping group firms may be found to have artificially segmented activities to fit into liberal FDI categories.
Fintech players, especially BNPL startups, must align correctly with regulatory definitions: misclassification can trigger FEMA violations, particularly if investor instruments like convertible notes are issued without approvals.
The actions against Myntra and Simpl underscore that the ED and government agencies are increasingly vigilant about revenue models that may superficially appear to fit one sector, but in reality operate in another.

If found non-compliant, both Myntra and Simpl could face penalties, legal adjudications, and potential restructuring of their FDI disclosures and capital-raising histories.

What Lies Ahead: Compliance and Consequences

For Myntra:

Must demonstrate that its wholesale business genuinely aligns with the wholesale license requirements.
May need to show that intercompany sales via Vector did not constitute disguised retail operations.
If found guilty, Myntra could face back taxes, penalties, and even constraints on future foreign investment.

For Simpl:

Must prove that its business classification was appropriate or retroactively seek government approvals.
Issuing convertible notes without clearance is viewed seriously it may trigger cancellation of such instruments or require enforcement adjustments.
Simpl could face regulatory sanctions and constraints on future fundraising if non-compliance is confirmed.

Both cases are now before FEMA’s adjudicating authorities who will evaluate legal defenses, compliance records, and factual business operations to determine penalties and possible remediation.

Conclusion

These high‑profile FEMA investigations of Myntra (₹1,654 crore) and Simpl (₹913 crore) highlight critical lessons:

Accurate classification of business model (wholesale vs retail, IT vs financial services) is essential not merely a paperwork distinction.
Related-party transactions must comply with caps and thresholds defined under FDI policy.
Policy interpretation matters: fintech platforms must adhere to RBI and government mandates, especially around instrument issuance.

These developments underscore India’s increasing emphasis on transparency, legal accuracy, and regulatory diligence particularly for startups and e‑commerce businesses attracting substantial foreign capital.

Sources:

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