Seller beware

It’s Digbijay. On Monday, the Supreme Court said an investigation by India’s competition regulator into Amazon’s and Flipkart’s business practices could go ahead. A few hours later, Amazon announced it would discontinue its joint venture with Catamaran Ventures next May, thereby shutting down Cloudtail, one of its biggest sellers in India.

Between the investigation into their business practices and the government’s proposed changes to the ecommerce rules, the two companies find themselves in a tight spot.

Why is Amazon shutting down Cloudtail India?

There is never a dull moment in Indian ecommerce.

Flipkart, much like Amazon, started operations by selling books online before expanding into many other segments. Now, it sells everything from smartphones to vegetables. While Flipkart was growing as a startup and expanding the online commerce market in India, things got interesting after Amazon founder Jeff Bezos sent Amit Agarwal to build the company’s India marketplace in June 2013.

Flipkart, founded by Sachin Bansal and Binny Bansal — both of whom had previously worked at Amazon — started competing with the US firm aggressively.

We are talking about billions of dollars. High-stakes games. And when stakes are so high, the government gets involved. Flipkart, now-owned by Walmart, and Amazon continue to fight each other for supremacy in Indian online retail. But they have had to increasingly spend more time navigating Indian policy changes for the sector over the past few years.

Earlier this week, Amazon said that from May 2022 it will not continue its joint venture with Infosys founder NR Narayana Murthy’s Catamaran Ventures that houses Cloudtail — one of the largest sellers on Amazon India. This is big.

The timing is interesting, too. Amazon’s Cloudtail announcement came on the evening of August 9. Earlier that day the Supreme Court said that it won’t stop India’s antitrust regulator — the Competition Commission of India (CCI) –from probing Flipkart and Amazon India, much to the disappointment of both companies.

Cloudtail is so synonymous with Amazon India that many of the employees working for the ‘seller’ firm feel they are working for Amazon. So, why is Amazon pulling the plug now?

It’s been in the making for a while, and there was a series of events that led Amazon to its big decision. In hindsight, Flipkart undertook some of these changes much before Amazon, though it continues to be affected by policy changes and the antitrust probe. We will get there, but here’s how it started:

In 2017, the government came up with new rules for FDI in ecommerce, saying one vendor can’t sell more than 25% of total sales on a single marketplace.

Simply put, Cloudtail,which at that point was moving at least 50% of the Amazon India order volumes, couldn’t service more than 25% of orders.

Cloudtail was a three-year-old JV and growing fast as a seller as Amazon pumped in billions to win more customers. Later in the year, Amazon set up another similar JV with Patni Group-Frontizo Business Service, which powers Amazon’s customer care in India. It also has a subsidiary called Appario Retail — now one of the top sellers on Amazon India.

Amandeep Lohan, most recently a category leader at Amazon India, has been appointed the managing director of Appario Retail for a period of five years effective August 2. We reported on August 11 that Amazon’s Amandeep Lohan has been appointed MD & CEO of Appario Retail, even as it remains to be seen if Amazon pulls the plug on this JV, too.

The 25% rule forced not only Amazon India but also Flipkart to widen its base of sellers so that no single seller accounted for more than a quarter of sales. From then on, Appario started seeing bigger exposure on Amazon India.

Meanwhile, Flipkart was working with a bunch of new sellers in which it did not have any equity investment but were emerging as prominent names in top categories. This led to the concept of ‘alpha’ sellers — the top 10 sellers on the marketplace.

Soon, offline traders and smaller online traders started complaining to the government and CCI that etailers were ‘circumventing’ existing laws by preferring certain sellers.

While all this was happening, Flipkart had already burnt its hands trying to have its own sellers on the platform.

WS Retail, which was set up by the Bansals in 2009, soon grew to be one of the dominant sellers on Flipkart. But the rules then said a foreign-backed ecommerce company could not sell goods on its own platform. So, in 2012, the Bansals sold their stake in WS Retail. And while WS Retail continued to sell on Flipkart it gradually reduced its exposure on the platform. While Flipkart learnt its lesson with WS Retail, its ghost is back to haunt its parent firm — Walmart — and its founders and key investors.

Now, just when Amazon and Flipkart felt things were stabilising, the government further tightened the rules for FDI in ecommerce in June. One of the major changes was that any group firm of an ecommerce company cannot sell goods on its marketplace.

This meant Cloudtail couldn’t sell on Amazon and neither could Appario. After much debate, the new laws were supposed to come into effect from February 2019. On the night of January 31, many thousands of products sold by Cloudtail vanished from Amazon India. This forced Amazon to reduce its stake in Cloudtail and Appario Retail — two of the biggest sellers on its platform — to around 24%. Before that, it held around 49%.

Amazon India has also been working with a set of prominent sellers in which it doesn’t have a stake. But Cloudtail and Appario are still a regulatory concern.

Traders and online sellers continued their complaints against both the etailers to the government and CCI. What happened next surprised many.

In January 2020, around the time Amazon CEO Jeff Bezos landed in India, the CCI announced the investigation into Amazon and Flipkart. There’s more. Bezos announced his company would invest $1 billion to digitise small Indian businesses. Piyush Goyal, the commerce minister, took a dig at Bezos, saying the investment was not a ‘favour’. Bezos did not get to meet any of the top ministers of the Indian government on that trip.

They may be fierce competitors but Flipkart and Amazon are agreed on one thing: halting the CCI probe. They filed petitions in the Karnataka High Court, which gave them interim relief by staying the probe. The CCI then went to The Supreme Court, which directed it back to the Karnataka High Court.

This time, Amazon and Flipkart didn’t have much luck as the court said the appeals deserved to be dismissed and said CCI could continue the probe. Again, Flipkart and Amazon moved the Supreme Court to stop the probe and this time the court made it clear that it would not. Within hours, Amazon announced it would not renew its Cloudtail JV.

The announcement had no mention of the Supreme Court ruling but the timing of the announcement was striking. Apart from regulatory concerns in India, Cloudtail has drawn attention in the UK over tax-related disputes of Cloudtail have also drawn attention in the UK as Rishi Sunak, chancellor of the exchequer, is Murthy’s son-in-law.

Also Read: Huge wealth of Rishi Sunak’s family not declared in ministerial register

Meanwhile, etailers continue to worry about the wide-ranging changes proposed by the ministry of consumer affairs. They have raised several concerns and the government is looking into it.

Fow now, it seems things are far from being settled for the sector before it gets disrupted all over again. As we said, there is never a dull moment in Indian ecommerce.

Let’s move on to other big developments of the week

■ Online executive education startup Eruditus raised $650 million in a new funding round led by venture capital firm Accel US and Japan’s SoftBank Vision Fund II, valuing the company at $3.2 billion. The fundraise catapults the company into the league of Indian startup unicorns.

Also joining the unicorn club this week were Bengaluru-based higher education platform UpGrad and cryptocurrency exchange CoinDCX.

■ VerSe Innovation, the parent firm of online news aggregator Dailyhunt and short-video platform Josh, has raised $450 million in a funding round led by Siguler Guff, Baillie Gifford and affiliates of Carlyle Asia Partners Growth II. Existing investors Sofina Group, Qatar Investment Authority and BCap also participated in the round. The company said its valuation has doubled from the previous fundraising round but didn’t disclose any details.

■ Early-stage investor Stellaris Venture Partners has raised $225 million for its second India-dedicated fund, coinciding with an unprecedented funding environment fuelling the domestic startup and technology sector. This makes the four-year-old Bengaluru firm among the largest in the seed-to-series A stage funds in India, a segment which has seen heightened interest over the past few years.

■ Travel booking app ixigo is planning to raise Rs 750 crore through a primary fundraise and Rs 850 crore via an offer for sale (OFS) from existing investors as part of its initial public offering, as per the company’s draft red herring prospectus (DRHP) filed with the capital markets regulator. Online travel agent MakeMyTrip has exited the company through a secondary sale clocking 8x returns on its $4.8 million investment.

■ Dream Sports, the parent company of online fantasy gaming startup Dream11, has set up a corporate venture arm called Dream Capital with a corpus of $250 million. It will cut cheques ranging from $1 million to $100 million in the areas of sports, gaming and fitness tech. The firm aims to back about 20 startups, each of which must have the potential to achieve at least $100 million in annual revenues within five years.

■ Japanese technology-focused staffing and services firm TechnoPro Holdingshas bought Udupi-based digital transformation solutions provider Robosoft Technologies for an estimated Rs 805 crore. Robosoft, which has built mobile apps for a slew of top Indian and global internet brands over the years, offers end-to-end solutions across various functions like product advisory, design, engineering and analytics.

Here’s a quick look at the top funding deals of the week

OTHER BIG STORIES BY OUR REPORTERS

Industry insiders say the size of India’s annualised Buy Now Pay Later (BNPL) market in gross transaction value terms has grown to around $1.5 billion-$2 billion in less than 18 months, from just a few million dollars in 2019, aided by the behavioural change induced among shoppers following the virus outbreak.Amazon Fresh online grocery orders in Bengaluru can now be picked up from the nearest More store within two-three hours. The service has gone live across many pin codes in the city. Amazon had partnered with with private equity firm Samara Capital to acquire the More retail chain from the Aditya Birla Group in 2019.The key reason for this is the raft of M&A deals and several companies going public post pandemic. The funds are adding talent to their investments team and hiring professionals with a mix of startup and consulting experience.

A product manager’s role doesn’t hinge on technical skills like coding, yet it is the most hyped in the tech startup space in India at the moment. It is also, however, riddled with myths. We try to dissect the hype.

India’s public technology platforms are inclusive and built on open architecture, and will drive future developments, according to experts. We also took a closer look into how the internet and digital technology have altered the way Indians live, work and play, from shopping online to making digital payments, as the country hot-steps into its 75th year as a free nation.A sudden surge in pay packages to attract the best of talent could nibble away the competitive advantage India has had all along and make it less attractive for global companies.Software product firms and cloud service providers have urged the government to revise the qualifying criteria for local suppliers to take part in public procurement contracts worth less than Rs 200 crore.

That’s about it from us this week. Stay safe and get that jab. ?

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