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US retail giant Walmart may face various legal hurdles before it can hope to pick up a stake in Indian e-commerce major Flipkart, while the Indian government might seek clarity on whether it will use this route to open offline stores.
While Walmart can pick up as much as 100 per cent in Flipkart as it is allowed to do so through the FDI route for e-commerce companies, it can open offline retail stores through Flipkart only if it is based on the platform model and not on an inventory one.
However, it can open offline retail stores if it confines itself to selling food products, and hence need not follow hefty conditions. For the rest, it will need permission from each of the States as several of them do not allow multi-brand retailing of products.
Sudish Sharma, Executive Partner for Corporate Law Practice at law firm Lakshmikumaran & Sridharan, told BusinessLine that foreign companies planning to get into Multi-brand retailing will have to adhere to a host of conditions.
“There are inherent risks, and a foreign company would want a clear path than fighting legal battles,” he pointed out.
Multi-brand retailing
Sharma said that while multi-brand retail trading under FDI on a pan-India basis comes within the domain of the Central government, the foreign entity will still need to get clearance from individual State governments.
The minimum investment for a multi-brand retailer, which can own up to 51 per cent in a joint venture with an Indian company, is $100 million. And 50 per cent of that amount needs to be invested in the backend infrastructure, excluding land cost within three years. Also, 30 per cent of the value of goods should be sourced from medium and small industries in India.
Meanwhile, sources in Flipkart said Walmart’s plans to buy SoftBank’s stake may not be that easy as the Japanese investor picked up the stake only last year, and is known to hold its investments for a longer period of time.
SoftBank stake
When SoftBank bought hedge fund Tiger Global’s stake in Flipkart as part of a series of buybacks, the e-commerce entity’s valuation went up to $17-19 billion as of late last year, according to business intelligence platform paper.vc.
SoftBank had earmarked $817 million for the buyback of shares from existing investors and former and current employees.
In April 2017, Flipkart’s website stated the company’s post-transaction valuation as $11.6 billion after a round of funding from Tencent, eBay and Microsoft.
SoftBank’s $100-billion Vision Fund had, according to reports, invested about $2.5 billion in Flipkart in August 2017. At that time, Flipkart had said it will have in excess of $4 billion of cash on its balancesheet.
After the buyback, SoftBank is now the largest shareholder in Flipkart with a stake of 23.62 per cent. Tiger Global is the second largest with 22.44 per cent of preference share capital. Naspers (MIH B2C Holdings BV) is the third largest with 14.57 per cent of preference share capital.
Accel India Fund managers (Accel + Erasmic Venture Fund) was the second-biggest beneficiary whose sale of less than 1 per cent of its Flipkart shares fetched the venture fund about $113 million.
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