Last month, the ED asked Flipkart, its early investors and co-founders Sachin Bansal and Binny Bansal, to explain why they shouldn’t face a penalty of ₹10,600 crore for alleged violations of several sections of the Foreign Exchange Management Act
The enforcement directorate’s (ED’s) notice to Flipkart and its founders for alleged violation of foreign exchange rules could handicap co-founder Sachin Bansal’s dream of getting a banking licence, three people aware of the matter said.
Last month, the government’s financial investigation unit asked Flipkart, its early investors and co-founders Sachin Bansal and Binny Bansal, to explain why they shouldn’t face a penalty of ₹10,600 crore for alleged violations of several sections of the Foreign Exchange Management Act. While the Reserve Bank of India may choose to ignore the ED notice to Bansal, it does dampen the chances of his Chaitanya India Fin Credit’s application for a universal banking licence, given that a licence holder needs to meet the regulator’s fit and proper criteria.
“Under the fit and proper criteria, RBI seeks clearance from all government agencies before issuing a banking licence," said a person aware of the matter on condition of anonymity. “The show-cause notice is an important development, which cannot be ignored. The regulator will have to take it into account before taking a final call."
Emails sent to ED and RBI remained unanswered while a spokesperson for Chaitanya India, through which Sachin Bansal has applied for a licence, said: “As a policy, we do not comment on any speculations with respect to the regulatory process."
The notice relates to ED’s eight-year-old investigation of Flipkart, which was bought by Walmart for $16 billion in 2018, and its co-founders. The objective of the probe was to determine if the online retailer violated foreign investment rules.
Once a probe is completed, ED sends show-cause notices to relevant entities, seeking a response, a second official said, also seeking anonymity. The notice to Flipkart is the culmination of the probe that started in 2012.
Flipkart started as an online retailer in 2007 at a time foreign direct investment in online retail was barred. To skirt the restrictions on overseas investments, the Bansals set up Flipkart India Pvt. Ltd as a business-to-business entity. This entity sold goods to WS Retail, a seller on Flipkart. WS Retail, owned by the Bansals until September 2012, in turn, sold these products to customers on Flipkart.com “If an investigation is ongoing against an individual, and if that individual has also applied for a banking licence, RBI will put it (approval for banking licence) on hold until the entire investigation is complete," said the second official. “This is because RBI seeks a response from all investigative agencies before it gives its approval."
In 2008, RBI put on hold its approval to UBS Bank to open a branch after it emerged that the ED was investigating an alleged transfer of funds between Pune-based stud farm owner Hasan Ali and a Saudi Arabian arms dealer through the bank.
To be sure, the regulator will also consider the nature and seriousness of the allegation before deciding whether to disqualify an applicant, said a third official, who declined to be identified.
Chaitanya India Fin Credit applied for a licence in December 2019, but RBI acknowledged that the microlender applied for a banking licence only in April this year.