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FDI Escapades

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Retail trading, in any form, by means of e-commerce, would not be permissible for companies with FDI, engaged in the activity of multi-brand retail trading.

With this penultimate clause, the Press Note No. 5 dated 20 September 2012 dropped a bombshell on one of India’s youngest and most promising businesses: the Rs 8,000 crore e-tailing industry. At one stroke, it turned nearly 25-30 of FDI-invested e-tailers — including large and visible names such as,,,,, and — into outlaws, raising a question mark over $800 million of foreign funds invested in them over the past five years. In many ways, this was probably inevitable; the industry’s brinkmanship with the FDI law had already reached its threshold. To understand how e-tailers were stretching the interpretation of the FDI law, consider our journey last week.
Forty-five kilometres from the Delhi-Gurgaon border, in the midst of a heavy downpour, nearly four hours’ effort to locate the warehouse of Xerion Retail in Sampka village on the Gurgaon-Pataudi Road has come to a naught. Just when we begin doubting its existence, four men at a tea stall point to a plot housing a large industrial shed. But instead of Xerion Retail (the firm that bills you when you shop on Fabfurnish or Jabong), the board of the building proclaims it to be the premises of Jade eServices, a firm funded by Jade 1076, owned by Berlin’s Rocket Internet’s Samwer brothers — Alexander, Marc and Oliver.

“It is (Jade and Xerion) one and the same,” declares the warehouse manager nonchalantly. Inside one of Indian e-tail’s most modern facilities, employees sporting T-shirts of Holisol — a workforce provider — are at work. Right in the middle of the packaging area full of branded boxes hangs a desolate board of Xerion.

Two companies within the same warehouse should hardly raise an eyebrow. Except that they are the means to circumvent the FDI law. Even as the nation was engulfed in a heated debate on whether or not to allow FDI in multi-brand retailing, e-tailers created an estimated Rs 8,000 crore industry while flouting the letter and spirit of the law that bars FDI in multi-brand retail.

The floor manager of Xerion echoes Jade eServices’ manager in-charge. “Videshi company yahan dhanda nahin kar sakti. Isliye Xerion banayi hai (Foreign e-tailers can’t do business in India. So Xerion was created),” he explains.

Two To Tango
A wholesale/cash & carry trader cannot open retail shops to sell to the consumer directly, says the Department of Industrial Policy and Promotion’s (DIPP) ‘Consolidated FDI Policy’ document dated 10 April 2012. That’s the law. The reality is, every foreign-funded e-tailer goes around it using the two-company route. Here’s how it works in, say,’s case. The foreign-funded firm (Jade eServices) carries the entire inventory on its books as an entity in B2B wholesale operations where 100 per cent FDI is allowed. But it cannot legally sell directly to the consumer. For that, it needs B2C entity Xerion.

The B2C company acts as a ‘front’ for the B2B firm and in most cases is publicly portrayed as a packaging and logistics entity. As soon as a customer orders a product on Jabong, Jade eServices conducts what the industry commonly calls a “flash sale” with Xerion, which then bills, packs and ships the product under its name, technically keeping the foreign-funded firm at an ‘arm’s length’ from selling directly to the consumer. But does it? “We are fully compliant with laws in India,” says an e-mailed response from Jabong, though many legal experts beg to differ.

“What’s new? Everyone in the industry knows this. It is exactly how Flipkart or any other e-commerce portal operates,” says the warehouse manager who was hired from, India’s largest e-tailer. “These things happen because the law allows them to happen,” says Subho Ray, president of Internet and Mobile Association of India. “We have reputed audit firms managing this aspect and we are fully confident that we are on sound legal footing on FDI,” says Mukesh Bansal, chief executive of   

Over the past five-odd years, this — and a few other structures — have been carefully crafted to circumvent the ban on FDI in multi-brand retail. Collectively, they are an industry now, which defies gravity with a yearly growth of over 100 per cent. But it is built on a shaky foundation, prompting many to constantly alter holding and board structures to seem compliant.

How this carried on for years, right under the nose of DIPP, the nodal agency for foreign investment policy in India and a part of the commerce ministry, is still a mystery. Was it a case of lazy babudom or complicity? There are no answers forthcoming. DIPP secretary Saurabh Chandra and joint secretary Anjali Prasad did not meet BW despite repeated requests. Detailed questionnaires too went unanswered. The commerce ministry has sent multiple proposals to the Cabinet to open up FDI, but has not sent a single warning to violators. Commerce minister Anand Sharma also did not respond.

In this four-month-long investigation, BW pored over hundreds of pages of filings with the Registrar of Companies for clues, visited warehouses ensconced in far-flung areas and contacted dozens of directors on boards of these companies. We also met scores of investors, venture capitalists and lawyers to understand the maze created to side-step the law.

Have FDI, Will Flaunt
24 August 2012, Bangalore: announced the completion of its fourth round of funding. Apart from existing investors Tiger Global and Accel Partners, two new investors — MIH (part of Naspers Group) and Iconiq Capital — participated in this round through a minority stake.
29 July 2011, Delhi: one of India’s fastest growing e-tailers, has raised $40 million from leading global investors Bessemer Venture Partners, along with existing investors Nexus Partners and IndoUS Venture Partners.

These aren’t exactly news clippings as they may appear, but dainty company releases boldly announcing foreign investment. Yet, even before Press Note 5, the law was clear. All manner of foreign investment was banned in sectors such as front-end retail. According to the bi-annual ‘Consolidated FDI Policy Document’ 2012, “e-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in business to business e-commerce and not in retail trading, inter alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.”

Yet, investors Tiger Global, Indo-US venture partners, Helion Ventures, Accel Partners, IDG Ventures poured in money. “We represent foreign investors. We will not do a deal where there is a grey area,” says Helion Advisors senior managing director (MD) Kanwaljit Singh who is invested in Hoopos, Yepme and Fashionara.

Before 2006: Foreign direct investment (FDI) in singlebrand retail prohibited
2006: FDI in cash-and-carry (wholesale) brought under ‘automatic route’. Earlier, it was allowed under ‘approval route’. 51 per cent investment in single-brand retail permitted
April 2010: Cash-and-carry wholesale trade subject to 25 per cent intragroup sales restriction
January 2011: After weeks of research, Rocket Internet dumps plans to open fashion portal due to the foreign direct investment restrictions
December 2011: Union Cabinet proposes 51 per cent FDI in multi-brand retail
January 2012: FDI in single-brand retail increased to 100 per cent
February 2012: Amazon sets up online marketplace — Junglee after waiting for FDI in multi-brand retail to open up
14 September 2012: The government opens FDI in multi brand retail up to 51 per cent (subject to
20 September 2012: The government clarifies e-commerce in both multi- and single-brand retail is not permissible for companies with FDI

Evidently, both these releases are meant to hide as much as they reveal. For instance, snapdeal. com cannot legally raise the money, as the release claims. The money is raised by Jasper Infotech, a marketing firm, while B2C entity Spinel Tradecom bills the consumer (only when products are warehoused within). Neither finds a mention in the release. Snapdeal CEO Kunal Bahl did not respond to queries.

As for, it has created a complex structure above its backend firm Flipkart Online Services (FOS), which held the Flipkart brand till it was transferred to Flipkart India, another B2B entity, in late 2011. Both entities licenced the brand to B2C firm WS Retail. The August round of funding of nearly $30 million in Flipkart India has come from Flipkart Singapore — one of the four new firms created by Flipkart in Singapore a couple of months ago., and Gurgaon-based Smile Group entities, and have all got foreign funds through similar structures. “The way these companies are structured does not comply with the spirit of FDI rules,” says Indian Private Equity and Venture Capital Association’s head Mahendra Swarup. “We have not done anything that is not in compliance with the law,” says Harish Bahl, founder-CEO of Smile Group.

The illegality of the structures is the primary reason why the world’s largest e-tailer, the $48.1 billion Amazon, has not gone live with despite buying as far back as 1998. Earlier this year, Junglee was re-launched as a platform for buyers and sellers. While big e-tailers Amazon, Walmart and Tesco chose to avoid getting into legal battles, others such as eBay and Groupon ( operate as a marketplace linking buyers and sellers.

Rocket Internet took the plunge after trying its luck in January 2011. It intended to launch a fashion lifestyle portal,, but shut shop after just 75 days due to FDI restrictions. “It does create complications but that is the law of the land. We can either not do it or we can do it in a way that is within the ambit of the law,” says Singh of Helion. “Let’s be honest, the underlying fear is that it is not legal, so no one talks about it,” says Swarup of Venture Capital Association.

Command And Control
Given that every e-tailer has built a structure that has many entities, it boils down to whether these have common management and control. Most e-tailers do not adhere to an “arm’s length” relationship between their B2B and B2C firms. There should be no relationship except as buyer and seller. But everyone violates the law through either common shareholders, directors or employees, which result in common management and control.

Take the case of Flipkart’s Tapas Rudrapatna. He is notified as director of WS Retail. Search for him takes BW to WS Retail’s registered office in Bangalore — a small, sleepy house with two gatekeepers on duty and some delivery boys wearing ‘Flipkart’ T-shirts. Nobody knows who Rudrapatna is. After a few calls, the guards direct us to a newly opened Flipkart office 5-7 km away. At the entrance,’s logo is displayed; at the reception there hangs a board of FOS. An HR executive arrives after a 30-minute wait. She confirms that Rudrapatna works for Flipkart from this office, but the man himself refuses to turn up. We leave our visiting card for Rudrapatna with a  request for a call-back, which never happens. As soon we leave, we get a call from Flipkart CEO Sachin Bansal requesting that we put off writing the article till he meets us. The question is: if WS Retail and Flipkart must maintain an arm’s length relationship, what is Rudrapatna doing in FOS office?

“As per the current FDI framework, Flipkart and WS Retail are not related. Flipkart operates in complete compliance within the scope of the FDI rules,” says Karandeep Singh, CFO, Flipkart India. Sachin Bansal cancelled a meeting with BW in Bangalore at the last moment.

Wherever the two companies have different directors, they are often dummies. Having hit a deadend with Rudrapatna’s whereabouts, we decide to hunt down WS Retail’s 50 per cent shareholder B.K. Bansal. We head to his hometown Panchkula, outside Chandigarh. Bansal, who told us that he was Sachin Bansal’s paternal uncle, informs us that even though he is on the board, he hardly knows anything about the business and everything is handled by Sachin. “Sachin’s business has expanded very fast, so he had to create another company,” says Bansal.

Evidently, every e-tailer operates their B2B and B2C companies through common management and control belying the very objective of FDI regulations. Snapdeal’s Jasper Infotech and Spinel Tradecom were both founded by CEO Kunal Bahl and COO Rohit Bansal.

Mukesh Bansal is the CEO of, which is run by Vector e-Commerce. He is also a majority stakeholder in back-end wholesale entity Myntra Designs. Ashutosh Lawania is a common founder of B2B Myntra Designs and B2C Vector e-Commerce. Both Lawania and Vineet Saxena, founders of Vector, were also major shareholders and directors of Myntra Designs.

In the case of, Arun Chandra Mohan, independent director in Jade e-Services, is also the founder and MD at Another director at Jade e-Services, H.S. Malhotra, is the co-founder and MD of Rocket Internet India. Yebhi’s CEO Manmohan Agarwal is a shareholder and a board member of B2B Big Shoe Bazaar India. On the other hand, senior manager of talent development at, Santosh Mishra, is a salaried director on the board of Shop Online Trading, the front-end arm of Big Shoe Bazaar that operates

Even though all e-tailers claim that their B2B and B2C firms are independent entities, in most cases, offices of the two are adjacent and sometimes on the same premises. As are their warehouses. In Flipkart’s case, take its 64,000 sq. ft warehouse in Mahipalpur in Delhi. It is officially under Flipkart India — the wholesale cash and carry firm that developed Within the warehouse, a small entrance leads to a 1,000 sq. ft room, which, according to the warehouse manager, is under WS Retail. It is mostly used to send products for delivery. Yebhi has a similar arrangement. The 100,000 sq. ft warehouse of Big Shoe Bazaar India has 500 sq. ft of space dedicated to Shop Online Trading.

Regulatory Merry-Go-Round

Treading a fine line between the dire need for foreign funds and avoiding rules, most e-tailers struggle to be on the right side of the law. They are frantically altering funding and management structures, often leaving a trail. Founders of both WS Retail and Spinel Tradecom exited after transferring their stake to relatives or trustworthy people. Bansals of Flipkart resigned as directors in February 2011, while Snapdeal founders quit as directors in November 2011.

Snapdeal’s Bahl told BW in July: “FDI in retail does not impact us as we are a marketplace and we do not have any such structure or second firm.” Not only does Snapdeal have a consumer facing entity, but it was also founded by Bahl together with his partner Rohit.The company had its registered office as Bahl’s residence and shares its corporate office with

At Myntra, after two years of B2B operation selling personalised gifts, Mukesh Bansal turned to consumer e-tailing in 2010. Vector e-Commerce was floated to act as the licensee of brand Myntra, while Myntra Designs raised funds. It is no different for others such as

Earlier in July, similar questions were raised by the Delhi High Court against the Bharti-Walmart structure on a petition alleging that it was illegally carrying out multi-brand retail trade. It was alleged that several Indian companies are acting as a “front” for foreign firms.

DIPP’s FDI circular also says wholesale trade would be permitted among companies of the same group. But such wholesale trade to group companies should not exceed 25 per cent of the total turnover of the wholesale venture. Hardly any company follows this rule. In its 2011 balance sheet, WS Retail declared buying goods worth Rs 29 crore from FOS and in the same year wholesale cash and carry arm Flipkart Online posted revenues of Rs 43 crore. It  means Flipkart Online sold more than 50 per cent of its goods to one retail entity. While FOS posted a loss of about Rs 24 crore, WS Retail enjoyed a healthy profit of Rs 1.09 crore. That raises the question whether the dealings between the two are on commercial terms, or otherwise.

Experts say that loans or heavy discounts to B2C firms are a way to transfer money to them for sustenance. The other means by which the wholesale entity fund the consumer facing entity is by paying a fee for maintaining the website and by sponsoring the marketing activities for promotion of the website. On the other hand, the front-end arm has to pay the back-end company the license fee for the website.

Who’s Funding Losses?
Most e-tailers are incurring heavy losses. Supporting losses is just one way in which B2B firms transfer foreign funding to the B2C arm. Their balance-sheets show that even though B2C or front-end firms are running into losses, they do not fund their losses. The question is: if the companies are not getting any funding from outside, who funds their losses? WS Retail in its balance sheet for March 2010 revealed that the company incurred a loss of Rs 5 crore. It said it received financial and operational support from promoters of FOS. Similarly, Shop Online posted a loss of about Rs 40,000 in 2010 and a loss of Rs 3,51,749 on sales of Rs 10 crore in 2011.

Incidentally, B2B firms incur losses heavier than what B2C entities show in their books. So, are B2B arms intentionally selling products at a loss to the B2C arm? Unlike the customer facing B2C firms that offer huge discounts to attract buyers, B2B arms need not sell below cost. So, their losses are inexplicable, unless they are meant to route foreign funds to the B2C arm.

So, what value do investors see in these B2B models? “Value creation happens in the consumer entity and if FDI was open we would have directly invested in the e-tail websites rather than putting money in the back end,” says Singh of Helion. It’s an open secret that investors evaluate the B2B and B2C entities as a whole. “We look at multiple things before investing. We look at challenges in availability of international brands, market size, gross margins, repeat buys and the number of customers,” says Mukul Arora, associate at Saif Partners, who has invested in and

E-tailers, of course, loved to believe FDI in e-tailing was a grey area. The unambiguous Press Note scotched this perception. Given that e-tailers’ B2B and B2C entities are so intertwined, claims that they comply with FDI rules sound hollow. If and when the government gets to lifting the corporate veil, e-tailers will find it tough to defend themselves. “If the government wants to come down, yes, this structure can be challenged,” says Swarup.


(This story was published in Businessworld Issue Dated 01-10-2012)