India’s largest e-commerce firm Flipkart has identified at least four large seller entities that will help it comply with two potentially troublesome foreign direct investment (FDI) regulations on offering discounts and capping a single seller’s contribution to overall revenues at 25 per cent, according to three people familiar with the matter and official documents.
Two of the four proposed sellers are Health & Happiness Pvt. Ltd and Consulting Rooms Pvt. Ltd, said the people cited above. The other two sellers will be registered later this year, they said, on condition of anonymity because of the sensitivity of the matter.
Along with WS Retail Services Pvt. Ltd, which is Flipkart’s largest third-party seller, the four sellers will help the company spread its sales sufficiently so that it complies with the new FDI rules by the end of the year.
The move is significant as it highlights how Flipkart is getting around FDI regulations that could have hurt its ability to deploy its preferred retail-heavy business model, albeit under a complex legal structure.
In late March, the government banned foreign investment in direct online retail but allowed 100 per cent FDI in online sales of goods and services under the so-called marketplace model, seeking to legitimize the existing businesses of e-commerce companies in India.
However, it added two riders that have far-reaching consequences for the firms: marketplaces cannot influence pricing of products and services on their platforms, directly or indirectly; and, one seller cannot contribute more than 25 per cent of sales of any marketplace. These riders will force online retailers to find new ways of offering discounts, and restructure their businesses.
Flipkart aims to achieve both objectives with the four proposed sellers, the people cited above said.
The proposed launch of the four sellers comes after Flipkart decided to move back to a retail-heavy model late last year, reversing its decision to become a pure marketplace. Mint reported on 5 April that Flipkart plans to shift a majority of its sales to a select group of third-party sellers to regain its once-vaunted customer service levels, which had suffered in the wake of its marketplace push.
However, after the new FDI rules capped the contribution of a single seller at 25 per cent of a platform’s overall sales, Flipkart needed more sellers to route sales through, as WS Retail generates more than 25 per cent of the firm’s sales currently.
WS Retail was owned by Flipkart co-founders Sachin Bansal and Binny Bansal (not related to each other) until September 2012. Flipkart started out as an online retailer but because of the ban on FDI in direct online retail, the Bansals were forced to create a complicated corporate structure. Flipkart India Pvt. Ltd, the business-to-business entity that received FDI, sold goods to WS Retail, which in turn sold products to customers on Flipkart’s site.
However, since the Bansals owned WS Retail, this structure was vulnerable to scrutiny from regulators.
Consequently, in September 2012, the Bansals sold their stake in WS Retail to Sujeet Kumar and Tapas Rudrapatna, two former Flipkart executives, and Rajeev Kuchhal, ex-chief operating officer at OnMobile. Still, weeks later, the Enforcement Directorate launched an investigation into the company’s business relationship with WS Retail.
Though WS Retail was independent on paper, Flipkart worked very closely with the seller.
Flipkart will have a similar working relationship with the four proposed sellers as it does with WS Retail, the people cited above said.
The original owners of one of the sellers, Consulting Rooms, are listed as Dinesh Verma and Sabina Verma, according to Registrar of Companies (RoC) documents. In May, Consulting Rooms allotted equity shares worth Rs.49,99,900 to Ajay Kumar Sachdeva and Mina Sachdeva, the documents show. Ajay Kumar Sachdeva is one of the directors on the board of WS Retail, according to the documents.
The other seller, Health & Happiness, increased its authorized capital to Rs.50,00,000 from Rs.1,00,000. Its original owners are also listed as Dinesh Verma and Sabina Verma. In June, the company sold shares worth Rs.25,00,000 to Sanjeev Kumar Khurana, Arun Kumar Vajpayee and Suvrat Khiwani, the RoC documents show. It’s not clear who these three people are. Khurana didn’t respond to an e-mail seeking comment.
In an e-mail, Dinesh Verma said he doesn’t currently own shares in Health & Happiness or Consulting Rooms.
Consulting Rooms and Health & Happiness will start offering products before the festive season, said the people cited earlier.
Apart from the four sellers and WS Retail, Flipkart will also work closely with a handful of large third-party merchants in key product categories such as electronics, home appliances and men’s fashion, they said.
The rest of Flipkart’s sellers, of which there are more than 90,000, will help with improving the company’s product range. But these sellers won’t account for much of Flipkart’s business, the people said.
A Flipkart spokesman said in an e-mail, “As India’s leading marketplace, we have over 90,000 sellers on our platform. Over 3,000 sellers apply every week to sell on Flipkart. These two companies have also applied to sell on our platform, like any other prospective seller. All our sellers are independent entities with no relationship with Flipkart beyond the working partnership between a seller and a platform.”
This story was first published on livemint.com