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Flipkart-Walmart deal: Biggest e-commerce deal so far

Walmart has bought 77% stake in Flipkart for around $16 Bn valuing the whole Company for around $20 Bn. It is the largest deal in e-commerce industry or perhaps the largest Merger are Acquisition (M&A) deal in India. Another deal of that level is acquisition of Essar oil by Russia grant Rosneft  for  around $13 Bn. Another deal of that level was Hutchison Essar acquisition by Vodafone . In this article we will discuss following questions regarding Walmart-Flipkart deal.

  1. Will this deal bring more foreign Money (FDI) in India?
  2. Is this deal about selling the Indian company to outsider?
  3. Why Walmart bought it?
  4. Why Amazon did not buy Flipkart?
  5. What would be the impact of this deal on India retailers?
  6. How this deal will affect the producers in Indian?
  7. What are the various challenges from government side?

1. Will this deal bring more foreign Money (FDI) in India ?

No, in fact there is nothing to be excited about this deal. No new FDI will come due to this deal. It will be cleared once we look at its shareholding prior to deal.

Share Holder Nature
Binny Bansal Indian
Sachin Bansal Indian
SoftBank Foreign
Other Institutional Investor Foreign

 

After the deal, Sachin Bansal shareholding and share holding of most of foreign institutional investor will reduce to 0% and share holding of Binny Bansal and some of Foreign Institutional Investor will be around 33%. Walmart will pay Sachin Bansal and foreign institutional investor to the extent to buy 77% of shareholding.

After the deal only the money to the extent of  Sachin Bansal shareholding will be extra foreign money coming  to India, which is very small part of overall share holding ( around 5%). Other part of the money will be paid be Walmart to the foreigners only.

2. Is this deal about selling the Indian company to outsider?

No, as explained,  prior to deal Flipkart was owned by foreigners and after the deal as well it is owned by foreigners. In fact Flipkart is Singapore registered company.  So this deal is simply means change is ownership from one foreigner to another foreigner.


 3. Why Walmart bought it?

It is no doubt India is a very big market, so every big player wants to enter here. Now Walmart major business is in retail (brick & mortar).

Earlier it has entered in India in retail business with Airtel Bharati. But FDI in multibrand is allowed only extent to 51%. Further, there is condition of compulsory procurement from domestic producers. This endeavor of Walmart was unsuccessful and it has to exit and incurred a loss of Rs 1800 cr. In e-commerce there is no such type of restriction and here 100% FDI is allowed. So we can say that Walmart bought Flipkart for two reasons. First to capture India market and another to enter in e-commerce to counter Amazon, which is his world-wide competitor.

 

4. Why Amazon did not buy Flipkart?

Had Amazon bought Flipkart than it would be market leader with almost 82% market share and consequently, will monopolize the market. But it may be bad for consumer. And Competition Commission of India (CCI) would not allow this. So there is regulatory hurdle in acquisition of Flipkart by Amazon.

5. What would be the impact of this deal on India retailers?

Prior to answer this question it is important to point out that retail business (brick & mortar, shop type of system) is the 2nd largest employment provider after agriculture. The e-commerce is a challenge to retailers but e-commerce is not going to replace it in near future. As the input infrastructure required for e-commerce is complex compare to brick & mortar. Off-course over the time if present retail business does not brought something new to its way of business than they may have to face the existential crisis.

However, it is not that we need to fight with this new evolved e-commerce system but should work with this and find out the ways how this new way can be used to generate more employment and better efficient product. As it is not right to fight some more efficient thing but that should be embrace.

6. How this deal will affect the producers in Indian.

E-commerce in-itself has resulted in internationalization of supply chain, but with this deal this internationalization will get a boost. Internationalization of supply chain means that procurement of product will be done from anywhere in the world and will be sold anywhere in the world.

Presently Walmart is not allowed (or perhaps limited permission) to sell in China but it can buy from China. Further, presently, there is no concept of compulsory domestic procurement in India for retail business. So it may happen that  Walmart will look at India to sell and at China to buy. In that case it may hit Indian producer and may hit Make in India program.

Here, either government has to put some compulsory domestic procurement as has been done in case of multibrand retail FDI or domestic producer has to be efficient as in case of China. Otherwise it may result into transfer of Employment to China and Profit to USA

 

7. What are the various challenges from government side?

In 11th WTO Ministry of conference meet India avoided any discussion on e-commerce. It has been considered that India was not prepared for this. Further. Govt. has set-up task force on e-commerce. Also these are challenges in term of Data Protection and non-clear policy on taxation. So one challenge which government has to come up to build a clear policy on e-commerce. Another thing which may be required to have a regulator explicitly for e-commerce.

Also as in Hutch-Vodafone case there was issue of capital taxation, that situation should not be arises here as this deal is exactly of that nature where there is change in ownership of some foreigner company with major revenue is coming from India operations. However on that side Indian has developed good framework of GAAR (General Anti Avoidance Rule). Also there is a clear judgment by Supreme Court if a foreign company drives its major value (at least 50%) from India, its capital gain is taxable in India and flipkart fall in this category.

 

In the end it must be added that whether this deal happened or not retailers, producers, Govt. will be having the same challenges which they are having with e-commerce. Further, by nature digital has the tendency of concentration whether it is retail or some other business. This deal is just a step towards more concentration in retail business.

The Same article has been discussed in Video.