FEMA files complaint against Simpl, alleging INR 913 crore FDI violation
In a significant development, the Enforcement Directorate (ED) has filed a complaint against Simpl, a Buy Now Pay Later (BNPL) platform operated by One Sigma Technologies Pvt. Ltd., alleging violations of the Foreign Exchange Management Act (FEMA). The ED accuses Simpl of improperly receiving foreign investments totaling approximately Rs 913.76 crore without the necessary government approvals.
The ED's investigation found that Simpl, which allows users to make purchases from partner merchants and pay later, usually every 15 days, misclassified its business activity as "benefits of information technology and other computer service activities." However, the ED's investigation determined that Simpl’s core operations fall under "financial activities," for which foreign investments require prior government approval rather than automatic clearance.
The ED alleges that Simpl raised foreign investment and issued convertible notes by misdeclaring its business activity and without prior approval. Specifically, the company received Rs 648.87 crore in Foreign Direct Investment (FDI) under the automatic route and an additional Rs 264.88 crore via convertible notes, also treated under the automatic route.
The ED believes Simpl broke FEMA rules by not seeking government approval before raising funds or issuing notes. As per the Reserve Bank of India's (RBI) rules, financial services not regulated by a financial authority need special government approval to receive FDI or issue convertible notes.
The key FEMA violations alleged are the receipt of Rs 913.76 crore worth of foreign investments (FDI plus convertible notes) without proper prior government approval, misclassification of the business to bypass regulatory scrutiny, and failing to comply with the required approval process for financial services-related foreign investments.
Founded in 2015 and headquartered in Bengaluru, Simpl has raised a total funding of over $83 Mn to date. Its investors include Green Visor Capital, IA Ventures, and Valar Ventures. The startup's cofounders include Chaitra Chidanand.
Last year, Simpl laid off more than 100 employees. The ED's probe found that Simpl's parent, One Sigma Technologies Pvt Ltd, received FDI to the tune of INR 648.87 Cr and also issued convertible notes amounting to INR 264.88 Cr.
Simpl operates in the Fintech sector and its business model allows users to make purchases from partner merchants and pay later, with the company making money by charging merchants a fee. The ED's complaint against Simpl comes at a time when the Indian government is increasing scrutiny of foreign investment in the Indian tech sector.
Meanwhile, the ED has also filed a second FEMA complaint, this time against fashion ecommerce giant Myntra, its related entities, and directors for allegedly flouting FDI rules to the tune of INR 1,654.4 Cr. The ED's actions highlight the increasing importance of complying with India's foreign investment regulations.
- In the Fintech industry, Simpl, a Buy Now Pay Later platform, is alleged to have violated the Foreign Exchange Management Act (FEMA) by receiving foreign investments totaling approximately Rs 913.76 crore without the necessary government approvals, while misclassifying its business activity as technology and computer services to bypass regulatory scrutiny.
- The ED's complaint against Simpl suggests that the company, which operates in the financial sector by allowing users to make purchases from partner merchants and pay later, raising funds through Foreign Direct Investment (FDI) and convertible notes, did not seek prior government approval, as required by financial services-related foreign investments under the Reserve Bank of India's (RBI) rules.
- As the Indian government increases scrutiny of foreign investment in the tech sector, the ED's actions underscore the significance of complying with FEMA regulations, as demonstrated by the filing of complaints against Fintech companies like Simpl and Myntra for allegedly flouting foreign investment rules.
