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Online fashion portals review their model

Legal experts believe a company would have to either restructure the business by a slump sale or a court process


Karan Choudhury  |  New Delhi 

Image via Shutterstock
Image via Shutterstock

It is not only Flipkart and Amazon which are trying to restructure their seller universe after the 25 per cent cap on vendors, part of the guidelines issued by the department of industrial policy & promotion (DIPP) on 100 per cent foreign direct investment (FDI) in e-commerce.

Jabong, Zivame, Koovs and Limeroad are among those in the sector with significant inventory and backed by foreign investors, exploring options to comply with the guidelines, wherein DIPP has said, "FDI is not permitted in the inventory-based model of e-commerce’’.

None of the marketplace entities operating in India as an inventory-based model would ever admit to this, from fear of being branded as not compliant with the present guidelines, said Amarjeet Singh, partner–tax, KPMG in India.

There have been select third-party vendors which have been carrying inventory on behalf of the platform owners listed as marketplaces, according to Singh. While a transition could be painful for some, a majority of the marketplace entities can achieve it with minimal changes in their business model, he said.

According to sector insiders, a majority of online fashion accessories and apparel companies, including Jabong and Zivame, own a sizable chunk of inventory. Fashion portal Koovs follows a completely inventory-led model. Myntra, acquired by Flipkart in 2014, has inventory but owned by a separate entity which is not related to the marketplace, said a sector watcher. It is then sold to vendors hosted on the marketplace. They have other business models at play as well, he said. Myntra could not be reached for comment.

Jabong is believed to follow a hybrid model of inventory and marketplace but is trying to move towards the latter format. Koovs refused to comment.

Recently, taking a rap at India’s largest e-grocer, Bigbasket, Future Group's chief executive, Kishore Biyani, said the online portal should immediately shut shop under the new guidelines, as it owns the inventory it sells. While Bigbasket claims it complies with all guidelines and regulations, other entities say such models in the grocery segment do exist.

“We have a pure-play marketplace model. We source from supermarkets, hyperlocal grocers and do not own any inventory. However, there are companies which do own inventory and they would have to make changes in the way they function,” said Milind Sharma, co-founder and vice-president at PepperTap.

Legal experts believe a company would have to either restructure the business by a slump sale or a court process. “Historically, FDI has been allowed in pure-play marketplaces (business to business companies) and not in business to consumer companies. Press Note 3, 2016, while clarifying the position, has also defined an e-commerce entity to broadly mean a company which is foreign owned and controlled (FOCC),’’ said Ganesh Prasad, partner at Khaitan & Co.

The contours of PN3–2016 would only apply to FOCCs engaged in the business of e-commerce and not to an Indian-owned or controlled company, says Prasad. ‘’An FOCC engaged in the business of e-commerce might have to explore options of restructuring its business by a slump sale or a court process. A transaction reversal might also be considered but the practical challenges of returning inventory to suppliers needs to be explored.”

However, the legal firm made a distinction for private labels that many e-commerce companies have under their banners. "Private labels can be owned by marketplaces and are different from the inventory sought to be captured by the recent guidelines.’’

While a company can seek legal recourse and interpretation of PN3–2016, with respect to retrospective applicability, one must bear in mind that policy decisions of the government might not come under a court of law, Khaitan & Co said. ‘’That said, specific post facto approvals from the Foreign Investment Promotion Board and compounding of offences from the Reserve Bank might also be an option for existing inventory-based models of e-commerce companies,” said Mukund Srikanth, senior associate, Khaitan & Co.

Jabong, Zivame, Koovs and Limeroad are among those with significant inventory and backed by foreign investors
  • Koovs: Exicom Telesystems (Singapore), Bready, Henderson Global
  • Zivame: IDG Ventures, Kalaari Capital, Unilazer Ventures
  • Jabong: Investment AB Kinnevik, Rocket Internet SE
  • Limeroad: ILightspeed Venture Partners, Matrix Partners, Tiger Global

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First Published: Mon, April 04 2016. 23:59 IST