Research and Articles

Directorate of Enforcement (“ED”), Bengaluru Zonal Office, filed a formal complaint in 2025 against one of the most widely used e-commerce platforms in India, Myntra Designs Private Limited (“Myntra”)¹. ED has alleged that Myntra has been violating the requirements under Foreign Exchange Management Act, 1999 (“FEMA”) to the tune of INR 1,654 crore (approx. USD 199 million). It was alleged that while Myntra raised foreign capital by declaring itself as an entity involved in wholesale cash and carry, the actual operations reflected that it was operating in the multi-brand retail trading sector. In this article, we will deep-dive into the law behind the contravention and understand the difference between treatment of wholesale cash and carry vs. multi-brand retail trading under the Indian exchange control regulations.                                                                   

BACKGROUND

Historically, the Government of India (“GoI”) has tried to protect the retail trading market from foreign influence through investments to ensure that local mom-and-pop shops / local kirana shops are allowed to operate in a protected market given they represent a huge proportion of Indian demography. It was only in 1997 that FDI was allowed in wholesale cash and carry business / wholesale trading while still keeping retail trading limited to Indian capital.  In 2006, partial FDI was permitted in single brand retail trade, and the sector was finally opened up fully only in 2018² while multi-brand retail trade still remains partially restricted.³ Therefore, the focus of the GoI has shifted from keeping retail market away from foreign capital, to regulating foreign capital in the retail market.⁴

It is interesting to note the difference in treatment of wholesale trading versus retail trading in the Indian exchange control laws. The differential treatment arises from the dichotomy of balancing efficiency /growth with fair competition and social implications. While opening up wholesale trading (which majorly relates to Business to Business, i.e. the  B2B market) brings along efficiency and growth through technological advancements and supply chain efficiency, open up retail trading (which is a Business to Customer, i.e. B2C market) increases risk of monopolization of the retail market by big foreign players with steady cash flows and social implications in terms of local stores being pitched against mega giants. 

WHAT IS SINGLE BRAND AND MULTI BRAND RETAIL TRADING?

The Indian FDI Policy has a different treatment for Single Brand Retail Trading (“SBRT”) and Multi-Brand Retail Trading (“MBRT”). SBRT means selling products only under one brand name to retail consumers. Therefore, SBRT is single brand B2C business. However, MBRT means selling multiple brands under the same roof as retail trading. Therefore, MBRT is a multi-brand B2C business. Salient features of both the business are as follows:

A. Single-Brand Retail Trading:

SBRT permits 100% FDI under automatic route, which means no government approval is required before accepting foreign investment. However, the same is subject to some conditionalities such as:

1. Same brand tag – Products sold should be of a single brand only and the products in question should be sold under the same brand internationally. However, there is no block on who conducts such a sale. It can be sold by the non-resident brand owner themselves or by an Indian entity which has legally tenable contract with the brand owner.

2. Domestic-sourcing – In case the entity conducting SBRT is receiving FDI beyond 51%, it is mandated that 30% of the value of goods purchased, should be sourced from India (ideally from micro, small, medium enterprises (“MSMEs”) and local artisans). Self-certification, subject to statutory audits, is required to confirm compliance with this mandate. The Indian company receiving FDI is responsible for meeting such sourcing requirements. All goods sourced from India by the SBRT entity for a single brand count toward the local sourcing requirement, whether sold domestically or exported. Sourcing for global operations can be set off against the 30% requirement, including direct or third-party purchases under valid agreements, by the SBRT entity or its group companies.

3. E-commerce permitted – SBRT entity operating through brick-and-mortar stores can have an e-commerce platform. E-commerce platforms can start operations prior to opening any physical store as long as a physical presence is established within 2 years of operations of online retail. Additionally, sourcing norms will not be applicable up to 3 years from commencement of the business (online or offline) where products have ‘state of the art’ or ‘cutting-edge’ technology and local sourcing is not possible.

4. Indian brands should be owned and controlled by resident Indian citizens and / or companies which are owned and controlled by resident Indian citizens. 

B.  Multi-Brand Retail Trading: 

Unlike SBRT, in MBRT, FDI is allowed up to 51% under government route. This means that foreign investors can own up to 51% of the equity in a multi-brand retail business, but they need to obtain approval from the government of India. However, fresh agriculture produce has been given exemption from being branded. It would be critical to note that such entry restrictions and conditions not only apply to direct investments but also indirect downstream investments. This FDI is further subject to some conditionalities, namely –

1. Back-end infrastructure - Foreign investors must bring in a minimum FDI of USD 100 million. At least 50% of this initial USD 100 million FDI must be invested within 3 years in back-end infrastructure, covering capital expenses like processing, manufacturing, distribution, design, quality control, packaging, logistics, storage, and warehousing, excluding land costs, rentals and front-end stores. The rationale behind this requirement was to strengthen India’s supply chain and logistics capabilities while encouraging long-term investments that contribute to country’s industrial and economic growth.

2. Domestic sourcing – Similar to the SBRT requirement,at least 30% of the value of manufactured or processed products procured must come from Indian MSMEs with plant and machinery investment not exceeding USD 2 million (valued at installation). Once classified as a small industry at first engagement, the status remains valid even if the investment grows. Sourcing from agricultural and farmer cooperatives also qualifies for the same, however, government will always have the first right to procurement of agricultural products. This procurement target is averaged over five years starting from April 1 of the year the first FDI tranche is received and must be met annually thereafter. Self-certification, subject to statutory audits, is required to confirm compliance with this mandate.

3. Geographic restrictions – Retail sales outlets can be set up only in larger cities with a minimum population of 10 lakhs subject to state government circulars. 

4. E-commerce prohibited – Retail trading in form of e-commerce would not be permissible.

WHAT IS WHOLESALE CASH AND CARRY? HOW DOES INDIAN FOREIGN EXCHANGE TREAT WHOLESALE CASH AND CARRY 

As per the FDI rules, in wholesale cash and carry business, FDI is allowed up to 100% under the automatic route, which means no further government approval would be required for the same. Wholesale trading is defined as sale of goods / merchandise to retailers, industrial, commercial, institutional, professional users, other wholesalers, or related service providers. It involves sales for business or trade purposes, not for personal consumption. Whether a sale constitutes wholesale trading depends on the type of customer, not the sale size. Wholesale trading includes resale, processing and sale, bulk imports with export / ex-bonded warehouse sales, and B2B e-commerce.

Few of the guidelines to be followed by wholesale traders to receive FDI are as follows –

1. License required – To undertake wholesale trading, all required licenses, registrations, or permits under the relevant Acts / Regulations / Rules / Orders of the State Government / Government Body / Government Authority / Local Self-Government Body under that State Government should be obtained. Sales by wholesalers qualify as cash & carry wholesale trading only when made to valid business customers, such as:

   1. Entities with applicable tax registrations;

   2. Entities with trade licenses or registrations under the Shops and Establishment Act;

   3. Entities holding retail trade permits/licenses (e.g., hawker licenses);

   4. Institutions registered as societies or public trusts for self-consumption; or

   5. Sales to government entities are excluded from this classification.

2. Maintenance of records – The wholesale trade entity is required to maintain full records indicating all details of such sales on a day-to-day basis.

3. Intra-group trading – The wholesale trade of goods is permitted among companies of the same ‘group’ only up to 25% of the total turnover of the wholesale venture as per amendments in April 2010⁵.

4. Wholesale and trading separation - A wholesale trader may engage in retail trading but must maintain separate, audited books of accounts for each business segment. Both the wholesale/cash & carry and retail arms must independently comply with their respective FDI policy conditions. 

DETAILS OF THE ALLEGED MYNTRA VIOLATION 

ED has alleged that Myntra violated Section 6(3)(b) of FEMA, 1999⁶, which empowered the Reserve Bank of India to prohibit, restrict, or regulate the transfer or issue of any security by a person resident outside India. The allegations are two-fold:

1. Misclassification of Business Type 

   According to ED, Myntra declared itself as a wholesale cash-and-carry entity to attract significant FDI under the automatic route, while in reality, it was allegedly engaged in MBRT activities, a sector where FDI is tightly regulated and capped at 51% under the government approval route.

   1. Carrying MBRT operations in the guise of wholesale: MBRT essentially involves direct B2C retail, but Myntra structured its operations to avoid this categorization. Instead of directly engaging with retail consumers, Myntra allegedly created a facade by routing sales through its related entity, Vector E-Commerce Pvt. Ltd. (“Vector”). Vector was created and continued to be used as corporate entity to bifurcate the B2C [(business to customer i.e. Myntra to retail customers)] transaction into B2B (Myntra to Vector) and then B2C (Vector to retail customers). 

   2. Why did it not qualify as wholesale trade: Wholesale trading involves selling goods in bulk to multiple, independent business entities such as retailers, institutions, or other wholesalers, not directly or indirectly to end customers. ED’s investigation revealed that nearly majority of  its sales were routed to a single retailer, i.e. Vector, rather than to a broad customer base of independent retailers. This narrow concentration was found to deviate from the true spirit of wholesale cash-and-carry, where diversification of sales is an expected indicator of genuine wholesale operations.

   Although publicly available documents do not conclusively set out the precise corporate linkages between Myntra and Vector, the ED investigation asserts that Vector was part of the Myntra group of companies and functioned only as a facade to disguise what was, in substance, MBRT activity.

2. Violation of Wholesale FDI Norms

   In arguendo, even if the above misclassification argument is set aside, ED has alleged that Myntra contravened the explicit FDI policy conditions applicable to wholesale trading. Under the amendments dated April 1^st, 2010 and October 1^st, 2010, wholesale entities receiving FDI are permitted to make only up to 25% of their total sales to group companies, while the remaining sales must be made to unrelated third-party business entities. In Myntra’s case, the ED found that majority of sales were made to Vector, a related party, thereby breaching the intra-group trading cap and violating both the FDI Policy and section 6(3)(b) of FEMA.

Thus, the ED’s case rests on a dual charge: (i) misrepresentation of its business model as wholesale to access unrestricted foreign investment, while in substance conducting MBRT operations; and (ii) violation of specific wholesale FDI requirements by routing all sales through a related group company, thereby contravening the policy framework designed to prevent precisely such circumventions.

CONCLUSION

In conclusion, the alleged violation by Myntra highlights the critical importance of adhering to India’s distinct regulatory frameworks governing foreign investment in retail and wholesale businesses. Myntra was working under the license of wholesale trade while it was allegedly carrying MBRT as it was selling to both the consumers directly and via a group entity. Additionally, in arguendo, even if Myntra did not violate the licensing regime by carrying MBRT on wholesale trade license, it violated the wholesale trade norms by engaging in intra-group trade exceeding the permissible volume.

While wholesale cash and carry trading enjoys liberal FDI norms under the automatic route, strict conditions, including limits on intra-group sales, are imposed to prevent misuse and protect domestic retail markets. The differing treatment of single brand and multi-brand retail further underscores the government’s intent to balance foreign investment with safeguarding local enterprises, particularly small retailers. Myntra’s case serves as a reminder for companies to maintain clear operational and financial separation between wholesale and retail segments and comply rigorously with applicable FDI policies to avoid legal pitfalls under FEMA and related regulations.

Sonakshi Babel, Parina Muchhala and Nishchal Joshipura
You can direct your queries or comments to the authors.

¹https://enforcementdirectorate.gov.in/sites/default/files/latestnews/Press%20Release-%20Myntra-23.7.2025%203.pdf.

²https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=192173.

³https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=191486&reg=3&lang=2.

⁴https://www.researchpublish.com/upload/book/FDI%20in%20Retail%20Entry%20to%20India-791.pdf.

⁵https://www.hcimauritius.gov.in/pdf/FDIManual.pdf.

⁶Section 6(3)(b) of Foreign Exchange Management Act, 1999.