Flipkart offloads front-end unit, more e-tailers may follow

Flipkart might trigger large-scale restructuring by e-commerce companies, industry sources indicated, as news broke that the poster boy of online retail had offloaded its stake in the front-end entity, WS Retail. Flipkart, like many other online retailers, has been following the two-company format, one for front-end or B2C (business-to-consumer) and another for back-end, infrastructure support and B2B (business-to-business).

Since e-commerce companies are not allowed any foreign direct investment (FDI) in multi-brand retail, most online retailers go for a multi-layered structure. Flipkart has foreign investment from multiple players including Accel Partners, Tiger Global and Naspers.

While Flipkart did not confirm or comment on the development, industry sources said that the company was forced to offload stake in its front-end entity because of the ongoing investigation by the Enforcement Directorate (ED) over violation of the Fema (Foreign Exchange Management Act). Along with Flipkart, Bharti-Walmart, too has been under the ED scanner for alleged Fema violations. Telecom-to-retail company Bharti is in a joint venture with American chain Walmart for a cash-and-carry and back-end venture.

Almost coinciding with the development of offloading its stake in WS Retail, Flipkart today confirmed that its chief financial officer Karandeep Singh had quit. Singh had joined Flipkart just a year ago.

On whether other online retailers would also distance themselves from their front-end companies so that foreign investment flow is not disturbed, Jones Lang Lasalle India managing director (retail) Pankaj Renjhen said that seemed likely from the compliance perspective. However, he added that the online retailers’ capacity to raise capital could get hurt with such restructuring. Another industry analyst argued that only companies with deep pockets can afford to just stick with the back-end entity.

Calling it just an issue of compliance, Arvind Singhal, chairman of Technopak Advisors, a leading retail consultancy, said the restructuring of Flipkart would not materially change its operations. “All kinds of creative structuring have to be done because of the government guidelines,” said Singhal. He agreed that most e-commerce companies would have to relook at their formats and make changes according to government guidelines.

Rajiv Kuchhal, former chief operating officer of OnMobile, led a clutch of Indian investors to acquire Bangalore-based WS retail, Flipkart’s front-end entity.

While the government allowed up to 51 per cent FDI in bricks-and-mortar multi-brand companies last year, FDI is prohibited in e-commerce. While no FDI is permitted in online B2C, there’s no restriction in online B2B or even back-end.