WHY FLIPKART FLEW OVERSEAS?

Flipkart commenced operations around 2007, at a time when the Indian e-commerce industry was still in a nascent stage and the sector’s revenues were just $ 100 million (nearly Rs 450 crore at the time). However, this industry had clearly established itself in the US, with players like Amazon who had largely ended the dominance of the traditional brick and mortar retail chain operations.

Sachin and Binny Bansal, co-founders of Flipkart, and former employees of Amazon, probably faced the similar sceptism that their legendary former boss Jeff Bezos also grappled with, when he commenced operations in this country, around 2005. And, that’s largely related to low internet penetration in this country and consumer’s reluctant to shift from their traditional pattern of shopping. However, against all odds, e-commerce startups here managed to scale up their operations and caught the attention of venture capitalists (VCs). Over the next few years, even more funds were allocated to such startups and valuations sky rocketed, but it was rather difficult for investors to exit.

Restructuring of Operations

The regulatory environment in India is also partly to be blamed for this ‘dampening’ effect in the e-commerce segment. And, it was due to these factors that resulted in Flipkart selling off its front-end operations - Flipkart Logistics to Rajiv Kuchhal-owned WS Retail Services, earlier this year.

Later, the back-end operations of this e-commerce player were acquired by Flipkart Holdings Singapore. Clearly, the online retail major is looking for an IPO to enable its investors to exit. However, in India, regulations require a company to be profitable before they list on the stock exchanges, in contrast to the situation in USA.

In addition, the Bansal’s needed additional capital to sustain their operations. And, after General Atlantic partners refused to make investments in Flipkart due to accounting issues, this e-commerce player has been facing a significant cash crunch.

As a result, Flipkart recently laid off 250 employees or about a tenth of its workforce.  The only way out for Flipkart would be an IPO and that should happen, given that it has shifted overseas. 

GOVERNMENT POLICIES

The government has turned down proposals for allowing FDI in business-to-consumer retail, and investors of Flipkart were left with two options; sell off the company at the best price or sell off the risky part of the business (logistics and delivery) and move the profitable part to a country, with more relaxed regulations.

Clearly, the Bansal’s agreed to the second option. And, investors in Flipkart might finally realise the returns on their investments, but the Indian government should reconsider its approach to its investment policies, if it wants entrepreneurship to thrive here. A detailed questionnaire sent to Flipkart on their operational strategy went unanswered.

Disclaimer: The views expressed in this column are that of the author and do not reflect the views of Chief Globalist.