Russian firm invests in two Indian e-commerce sites

Russian company ru-Net seems to have become the first foreign company to invest in an Indian online retail company. The Moscow-based internet and technology investment company invested $17 million (Rs 95.2 crore) in Freecultr and BeStylish, two e-commerce websites backed by the Smile group. This was also the first time a Russian company invested in India’s internet space.

E-commerce companies operating in India are governed by the same FDI (foreign direct investment) rules as other brick-and-mortar retail chains. At present, multi-brand retail chains are not allowed any FDI, while single-brand outlets can get foreign investment up to 100 per cent.

But online players are known to be running on foreign funds, mostly of international venture capital and equity funds. E-commerce or online chains structure the investment in such a way that front-end billing to customers is not done by companies that have foreign funds. As foreign investment is allowed for back-end operations, as opposed to front-end retailing, e-commerce companies typically work around these rules.

ru-Net invested $9 million (Rs 50.4 crore) in Freecultr and $8 million (Rs 44.8 crore) in BeStylish. While Freecultr is an apparel designing and retailing company, which was recently in the news for its merchandising tie-up with Bollywood actor Shahrukh Khan’s Kolkata Knight Riders, BeStylish is a shoe e-retailing company. BeStylish sells about 1,000 pairs of shoes daily and Freecultr 190-200 pieces of clothing.

“Yes, it is correct ru-Net has invested in Smile and Freecultr,” said Sujal Shah, chief executive of Freecultr.

But the Smile group refused to divulge the valuations at which the money was raised. Repeated calls made to Harish Bahl, chief executive of Smile group, went unanswered. Sources close to the deal told Business Standard that ru-Net valued Freecultr at $25 million (Rs 140 crore) and BeStylish at $35 million (Rs 196 crore), respectively.

A Smile group official said, “The reason Smile went to ru-Net for money has mostly to do with the fact that it was unable to raise money from existing private equity (PE) players in India.”

PE sources said the properties were overvalued at these prices. “To justify a $25-million valuation, any given company has to have about 1,000 transactions a day, where Freecultr is just doing 200 transactions daily. This is another example of an inflated deal,” said a PE player.

But the Smile group official said for ru-Net, the transaction had been driven by the need to gain an entry into India. “Besides this, it sees the deal as a long-term partnership with Smile, which has a pretty diversed portfolio,” he said.

The e-commerce segment in India was supposed to touch Rs 47,000 crore last year, growing at 25-30 per cent a year. Most investments in e-commerce till date have come from the UK and Mauritius-based funds like Sequoia Capital and Tiger Global.

Germany’s Samwer brothers have also taken aggressive bets on the Indian e-commerce market with their apparel retail site Jabong. According to industry estimates, Jabong is spending about Rs 75 crore a month on online advertising.