When a company that’s been bought out by another goes on to acquire a company that’s on the verge of being bought by another company ... things are going to get more than a little confusing. To those who have not been following the dizzying activities in Planet E-Commerce, Flipkart bought Myntra in 2014, and Myntra bought Jabong in July 2016. Oh, the buzz around that time was that Snapdeal, the other e-retail biggie, was on the verge of buying Jabong, when Myntra snatched it away.
Now, much of the drama surrounding the buy has been covered in dreary detail. Did Myntra pay too much for Jabong? Did Snapdeal actually have the wherewithal to buy another company? What was Flipkart’s big game? And so on. Here’s the thing. Myntra spent $70 million (then Rs 449 crore) to buy a company that reported revenue of Rs 902 crore in 2015-16 and net loss of Rs 362 crore. The same year, Myntra reported consolidated revenue of Rs 1,031.8 crore and loss of Rs 823 crore.
Why did investors Rocket and Kinnevik sell a company that seemed to be leaking less than peers in the industry? The popular narrative revolves around corporate governance violations at Jabong and the controversial sale of GoJavas, the logistics arm of Jabong, to Snapdeal in 2015. (Snapdeal has since sold its stake in GoJavas to an entity named Pigeon Express and filed a complaint with the Economic Offences Wing against former senior executives of QuickDel Logistics, the company operating GoJavas. That’s a story for another day.)
Of course, corporate governance issues may have played a part. But the way Jabong was dropped by its investors seems more like a strong case for cleaning up the litigious corporate structures of Indian e-commerce companies. These complex structures are the result of the existing rules governing foreign direct investment (FDI) in e-commerce companies. For nearly a decade, the law allowed FDI only in business-to-business e-commerce sites and not in e-retail, which is business-to-consumer. Last year, the government allowed FDI in e-retail, but only in companies following the marketplace model. That is, the company provides a platform for sellers and buyers, and does not sell its own products.
Companies like Flipkart, Myntra, Jabong, Snapdeal and a host of others grew at a time when the FDI norms were less clear. To ensure that they got adequate funding, they set up complicated webs of companies that allowed them to toe the line of FDI regulations and still raise foreign capital.
Here’s how that typically worked. One company registered would be the owner of the domain name and the brand name and would operate the site. Another, with no connections with the first on paper, would source products from vendors and manufacturers. A third, unrelated to the other two companies, would operate warehouses and take ownership of the logistics operations.
This is the model that Jabong, founded in 2011, followed. The customer-facing part was Jabong, which was run by Jade eServices; Rocket Internet invested directly in Jade. Xerion Retail was the primary seller and owned by a promoter who had links with the Rocket Internet India management. Jabong also had an internal logistics division, then called Javas. Creating such a structure enabled Rocket Internet and Kinnevik to invest nearly $350 million (Rs 2,211 crore) into Jabong till 2014. A similar situation existed in most other e-retail companies that relied on FDI (and who didn’t, especially back then).
All of this did not escape the eye of the law, of course. Between 2012 and 2014, Indian e-commerce firms were increasingly being subject to investigations from the Enforcement Directorate, the government agency which looks into violations of foreign investment regulations. Pretty much every e-commerce biggie was investigated, from Amazon, to Flipkart, to Myntra; till date, as far as we know, there’s been no word on these investigations being concluded.
Rocket Internet declined to comment when asked about this. But sources at Jabong, who asked to remain anonymous, say that Rocket Internet started reviewing its investment in Jabong around the time of the German company’s IPO on the Frankfurt Stock Exchange.
Whatever Rocket’s plan were, one thing is becoming increasingly clear: Jabong may not have got into trouble and then be sold if not for its complicated structure of companies. Here’s why. Though Javas was created as part of the Jabong network, in 2013, it became an “independent entity” under a company called QuickDel Logistics. On paper, QuickDel had no relation with Jabong, or to be specific, Jade or Xerion. But as The Ken reported, Jabong co-founder Praveen Sinha got 50% in QuickDel soon after its inception. Sinha was Jabong’s managing director then. Later, QuickDel applied to register the trademark GoJavas.
Later, Snapdeal took a stake in QuickDel. Rocket, however, was not part of either the creation of QuickDel or the investment by Snapdeal.
None of the parties would go on record about this incident, and like everyone else, we have pieced the story together from what’s available in public. An anonymous Twitter user going by the handle of Unicon Baba published a tweet about Rocket taking legal action against Sinha for skimming off Rs 100 crore from Jabong. That tweet has since been deleted and Sinha has apparently filed a case against the user. But the damage was done.
According to media reports, Rocket initiated what has been called Project Flush, an audit by PwC in Sweden. The Project Flush report was leaked to the media by Unicon Baba, and we have been unable to independently verify if this did indeed happen. Jabong issued a statement that said: “All relevant parties had met on this matter and concluded that no value transfer has happened and hence all matters referred in the alleged report stand closed.”
Much of this is innuendo and industry gossip. What matters is that there was a convoluted arrangement in place regarding the GoJavas sale. And much of this could have been avoided had the regulations not been as complex. Here’s the thing to remember. While the government allowed FDI in e-retail from last year, the regulations remain restrictive. And so the corporate structures remain as confusing. Under the current set of regulations, 100% FDI is allowed in e-commerce entities operating under a marketplace model where they do not have any ownership over the inventory. Further, the marketplace needs to ensure that no seller is allowed to sell more than 25% of the total sales on its platform in a financial year. The marketplace cannot directly or indirectly influence the pricing of the products sold on its platform. Further, 100% FDI in courier services through an automatic route—as against on an approval-basis by Foreign Investment Promotion Board—came in place only in mid-2013. What has resulted is the spawning of new sellers with ambiguous past histories. For example, over the course of researching for this story, I ordered a range of products like bedsheets, clothes, and shoes from Myntra. All the products were serviced by three sellers—Savadika Retail, Konde Products & Services, and Tech Connect Retail. According to filings with the Registrar of Companies, these entities have emerged in the last year and are promoted by people who do not appear to have any prior connection to the retail business. In fact, one of the sellers is promoted by a person whose profession is stated as ‘Home Maker’.
Yes, the government can levy penalties of billions of dollars if it takes an aggressive stand on this, say lawyers. But equally, most of the lawyers I speak to say that e-commerce has assumed the stature of an industry that’s “too big to fail”. “I don’t believe that the lawmakers will ever go on a witch-hunt of e-commerce firms. Today, these are the companies creating thousands of jobs in the country, attracting foreign capital, and making products cheaper for customers. In time, regulations will simply need to be eased with regard to both e-commerce and retail,” says a Mumbai-based lawyer on the condition of anonymity, since he works with several e-commerce companies.
While the government has good reasons to protect e-commerce and to limit FDI into multibrand retail and e-commerce, the current regulations are “too restrictive” when compared to similar economies, says Vinay Joy, associate partner at law firm Khaitan & Co. “Relaxation of the regime, for instance allowing 100% FDI under the automatic route in e-commerce companies with an inventorybased model, will most likely increase business efficiencies,” he says. However, he adds that “there are fairly valid reasons to continue with protectionism in this sector”. One of the big reasons, especially for a government that’s promising jobs for all, is that a liberal FDI regime poses a risk for unorganised retail sector jobs.
Others don’t buy this argument, saying Indian e-commerce firms are strong enough to compete against their foreign counterparts. “FDI has not killed businesses in India, but has helped them reinvent themselves and become stronger using the best practices introduced by their foreign counterparts,” says Akash Gupt, partner and leader, regulatory, at PwC India. “History bears testimony to the fact that with their long-term commitment to the Indian market, many foreign companies have given us some of the most iconic brands, which have not just contributed to India’s GDP and growth, but have become a part of our success story. There is enough empirical evidence to demonstrate that it has created better competition in the market, albeit with enhanced customer experience.”
Meanwhile, moving away from the regulatory quagmire, the new Myntra (plus Jabong) is hopeful of turning Ebitda (earnings before interest, tax, depreciation, and amortisation) positive “soon”. Ananth Narayanan, CEO of Myntra and Jabong, says his companies see more customers than Shopper’s Stop and Lifestyle combined. Today, the Flipkart group’s fashion businesses—Flipkart Fashion, Myntra, and Jabong—together account for close to 70% of the $3.5 billion market for online clothing and textile shopping.
Like any proud leader, Narayanan isn’t shy to list out the operational improvements of both Myntra and Jabong over the years. “The last two years have been fabulous,” he says modestly. “Myntra used to be valued at $350 million, with double-digit negative Ebitda and negative unit economics. Now Myntra plus Jabong will end this year at $1.2-1.3 billion valuation with an exit run rate of closer to $2 billion. Both Myntra and Jabong now have positive unit economics, and hopefully will soon hit Ebitda profitability, which would be the first in this industry.”
Narayanan is optimistic, as is Gunjan Soni, chief marketing officer as well as head of Jabong. They have reason to be. In the first quarter of the current fiscal, “sales grew 50%. For a company where sales growth was slowing down, a 50% growth is something people here did not think would be possible. The growth momentum is sustaining and now the focus is shifting towards attaining profitability,” says Soni.
Flipkart seems to have pulled off the somewhat difficult feat of integrating both Myntra and Jabong while still maintaining the unique brands. One of the big reasons for Jabong’s success in the new scheme of things has been the fact that it can ride on the logistics divisions of Myntra and Flipkart— Myntra Logistics and Ekart. Narayanan says the move to Myntra Logistics was particularly good for Jabong because the logistics player has the lowest cost for delivery of fashion goods, with the entire system not handling bulky goods at all. Already, 45% of Jabong deliveries happen through Myntra Logistics, about 30% through Ekart, and the rest through third-party logistics services.
Also in the works is an exercise to dovetail tech efforts. “We are getting the tech stacks to come together. The reason for that is if you have a larger technology team, you are able to hire better talent. You can also leverage benefits on the platforms of both brands. In the next few months this should be complete,” says Narayanan.
A Myntra spokesperson adds: “While discounts and sale events as a proposition are going to continue, we are changing the mix towards newer fashion and hence seeing reduction on average discount levels, which naturally tends to be higher for late-season merchandise.”
Which is all good news for the three brands— Flipkart, Myntra, and Jabong. The challenge now is not just to grow and turn Ebitda positive, as the company hopes. The real challenge will be for this e-commerce conglomerate to navigate the murky waters of regulation.
The problem of out-of-date regulations for Internet based businesses is not peculiar to India. In a recent article, The Economist chronicled a similar problem in China, which has prevented the country’s largest e-commerce firms to be publicly traded on Chinese stock markets. India has been late to the e-commerce revolution, partly due to the lack of Internet access. But in cases like this, being late can help lawmakers not make the mistakes their international peers have made. India’s e-commerce is a vibrant space full of new ideas. Indian lawmakers have to find a way to ensure regulations do not strangle this vibrancy and innovativeness.
(The story was originally published in the October-December 2017 special issue of the magazine.)