Long-Lag Compliance And Diligence: A Conversation With Archana Balasubramanian

BACKGROUND

Recently the Enforcement Directorate (ED) has issued show-cause notices totalling INR 1,654 crore to Myntra Designs Pvt Ltd and its affiliate Vector E-Commerce Pvt Ltd. The investigation focuses on structuring decisions dating back to 2010, when the company, then an early-stage, foreign-funded online apparel platform, created multiple group entities so that a marketplace front-end could sell inventory held by related sellers. Although that arrangement was widely used to navigate India's multi-brand retail restrictions on foreign investment, regulators now allege that the model breached the Foreign Exchange Management Act (FEMA). Because FEMA liability attaches to the "persons responsible" during the period of violation, the ED has named Myntra's founding principals even though control later passed to Flipkart in 2014 and to Walmart in 2018.

Vakil Vetted: Thank you for speaking with us, Archana. To begin, what is the single most important lesson growth-stage companies should take from the ED's current FEMA action against Myntra and Vector E-Commerce?

Archana Balasubramanian: The key lesson is that a structural choice made at formation can become a permanent compliance requirement. If that structure is not reassessed as the business scales or as regulations evolve, it can transform into a retrospective violation years later. Myntra's 2010 entity layering may have been considered policy-compliant at the time, yet it is now under enforcement scrutiny in 2025.

Vakil Vetted: Why does liability still attach to the original founders even after multiple acquisitions, including Flipkart's purchase in 2014 and Walmart's in 2018?

Archana: Under FEMA, liability attaches to the persons responsible during the period of an alleged violation. Those individuals remain on record regardless of share dilution or loss of operational control. In addition, directorships under the Companies Act carry continuing fiduciary duties. Founders who keep statutory positions or even small shareholdings stay on the hook long after exit events. Moreover, early-stage acquisition agreements often include steep indemnity provisions. When combined with regulatory proceedings, these clauses can translate into uncapped personal liability, which may prove crippling for founders years after they have ceded operational control.

Vakil Vetted: Digital-first sectors often rely on complex structures. How did marketplace versus inventory questions factor in situations such as these?

Archana: To navigate foreign-investment restrictions on multi-brand retail, many e-commerce firms used group entities as primary sellers while positioning the platform entity as a neutral marketplace. This architecture created a perceived separation between inventory ownership and online retail operations. Over time regulators re-interpreted those distinctions. Without grandfathering, a structure that once appeared compliant can suddenly be classed as a prohibited model.

Vakil Vetted: How can diligence practices be improved to better prepare an acquirer today?

Archana: For FEMA compliance, diligence cannot stop at the closing date. It needs to trace back to the very first instance when foreign exchange or FDI reporting obligations arose. That means mapping every structural change, related-party transaction, and seller arrangement across the company's entire lifecycle. In multi-layered organisations, this exercise becomes even more critical, since indirect ownership structures and cross-entity flows can obscure violations. Alongside this, acquirers must overlay the significant beneficial ownership (SBO) requirements under the Companies Act to identify who actually exercised control at each stage. When diligence is framed this way, it transforms from a point-in-time verification into a historical compliance audit.

Vakil Vetted: How does this affect founders' personal brands and future ventures?

Archana: An enforcement notice, even when eventually settled, can damage a founder's reputation. Capital allocators pay close attention to public investigations. If founders appear in enforcement documents, limited partners question governance cultures across the portfolio. That reputational drag complicates future fundraising and board appointments.

Vakil Vetted: Given these long-tail risks, what systematic approach would you recommend companies adopt to make sure legacy structures stay compliant?

Archana: I recommend instituting a formal Five-Year Legacy Audit. First, map the entire corporate structure from inception, capturing every change in control or capitalisation. Second, align each structural snapshot with the FEMA and FDI rules that applied at that time. Third, preserve all internal legal memos and regulator correspondence that supported earlier interpretations. Fourth, assign clear responsibility windows so directors know exactly which periods they covered. Fifth, prepare a public-facing narrative that explains historical compliance and any remediation. Conducting this audit every five years, or immediately before a fund-raise or sale, turns hidden exposure into a managed risk.

Vakil Vetted: What practical steps do institutional investors add to their diligence playbooks? Should they do anything differently now?

Archana: They generally request full archives of legal opinions from the formation stage onward, not just current cap tables. They need transaction-pattern analyses that compare historical related-party sales to thresholds under the policies then in force. Finally, they should work with regulatory specialists to create retrospective compliance maps, ranking risk by vintage rather than by present-day documentation alone. In my view – it is more of mindset change – where institutional investors should flag off regulatory compliance as very high level risk as eventually law will catch up.

Vakil Vetted: How do you see regulatory risk intersecting with brand risk in cross-border capital flows?

Archana: Foreign investors monitor headline enforcement actions closely. Even if a target ultimately prevails, the initial narrative may chill deal momentum across a sector. Board members face fresh oversight questions, portfolio managers field calls from limited partners, and compliance teams scramble to demonstrate control frameworks. In that sense, regulatory risk and brand risk are now inseparable. Funds needs to be able to put their directors on the Board of the target.

Vakil Vetted: To conclude, what mindset shift do founders and executives need in order to future-proof their structures?

Archana: They must treat structural creativity as a provisional solution, not a permanent one. Each funding round or strategic pivot should trigger a backward review of earlier assumptions. Smart structuring today requires forward-looking optimisation accompanied by disciplined validation of legacy choices. When enforcement timelines stretch across decades, the past is never truly past.