Exclusive: ShopClues under ED probe for potential FDI violations

ShopClues seems to be in more trouble than it appears. While it has been desperately eyeing a buyer to avoid collapse, the firm is under the Enforcement Directorate (ED) scanner for the way it raised funds via US-based holding company - Clues Network Inc.

According to three Entrackr sources, ED has been investigating ShopClues for a potential violation of rules under the Forgein Exchange Management Act (FEMA) since past two years. “ED had sent the first notice to ShopClues in 2017 and since then the investigation has been going on,” said sources, which include former senior employees of the company. 

All sources requested anonymity as they don’t want to trouble their relation with ShopClues.

Any adverse conclusion by the Enforcement Directorate can have serious consequences. “If the company is found circumventing FEMA framework, it’s likely to be penalised heavily in addition to other liabilities,” added sources. 

Sources emphasised that Reserve Bank of India had asked for clarification over ShopClues’ funding from its holding entity. But the apex banking body wasn’t satisfied with the inputs provided by the company. As a result, RBI had transferred the matter to ED.

Since 2017, the investigating agency has issued several notices to the Gurugram-based company, asserted sources.

Entrackr hasn’t been able to ascertain the exact progress and current status of the investigation. Our detailed questionnaire sent to the ED two weeks ago didn’t elicit any response. We will update the post as and when they respond.

"Our holding parent entity is US (Delaware) based – we routinely transfer money from our parent entity into India. This requires RBI compliances under FEMA, which are fully compliant with. The ED notice you mentioned was to request these compliances, which we have shown to them to their satisfaction," said ShopClues in a statement via email.

It’s worth noting that ED has already served notices and is conducting probe over foreign investments received by Flipkart, Myntra, and Amazon. Investigation on Flipkart and Amazon for flouting foreign direct investment rule is still underway. 

According to media reports last year, the law enforcement and economic intelligence agency had found strong pieces of evidence against Flipkart and is likely to impose a penalty in tune of over Rs 1,000 crore.

The investigation by ED has surfaced at a time when ShopClues has been exploring distress acquisition deal with several companies after its talks with Snapdeal went off. According to sources, the company is currently scouting merger and acquisition deal with several entities. 

“Paytm Mall, Craftsvilla, Future Group, Vishal Mega Mart and Jio are examining this distress offer at the moment. However, it remains unclear whether any deal will happen or the company will go under. 

Given that ShopClues’ future is in uncharted territory, it has finalised plans to fire another 150-200 employees in the next 2-3 weeks. Last month, the company fired 200 employees, without offering them proper severance compensation. “The strategy is to bring the employee count to around 100 and keep the operations alive until a buyer steps in,” added sources.