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Year of 2014-16 India have witnessed substantial slowdown in mergers and acquisition (“M&A”) whereas after 2016 the country have gain boost. In 2014, Indian companies were involved in transactions worth $33billion whereas in the year 2015, the value of M&A activity reduced to $20 billion. (Tiwari, 2011) The election of Modi led government has brought back tremendous faith in the investor community by introducing schemes like Digital India, Startup India, new bankruptcy law and the faster pace of approvals initiated by the government as for the ease of doing business in India campaign. In 2018, India has witness the biggest e-commerce acquisition of Flipkart, an Indian startup company by American giant retailer Walmart (Bierman, 2017). This deal has went through a lot of legal challenges at each face dealing with various FDI guidelines and a nod of CCI and a lot of criticism on the part of traders. In this paper the author has tried to focus on the merger of Flipkart and Walmart and discussed the problem and challenges faced by both the companies and what was the issue held by CCI along with the concept of vertical and horizontal mergers author has also laid down the reason why Walmart have chosen Flipkart for the acquisition and what is the present case of M&A in India.
Merger and acquisition (M&A) is the path businesses take to achieve exponential and not just linear growth andtherefore continues to generate interestand the Indian landscape is no different (Hiten, 2017). With the increasing rate of growth of economy in India, it is considered to be suitable for the growth of business taking into account the size of population and being a developing nation various aspect remain undiscovered. In the upcoming years it is anticipated that the value of transaction would cross $ 30 billion (Tiwari, 2011) owing to the relevant corporate laws/regulation in India which have been revamped in the last few years, be it Takeover code, companies Act, Competition law, delisting guidelines, accounting, tax laws are continually evolving and so are foreign exchange management (FEMA) regulations, impacting both inbound and outbound investment. The Merger and Amalgamation of corporate constitute an area under discussion of companies act, the courts & law and there are well laid down procedures for appraisal of shares and rights of investors whereas acquisition/takeover bids fall underneath the purview of SEBI (Anil Kumar, 2012).
Walmart - Flipkart deal have gained everyone’s attention due to the purchase of 71% shares by paying $16 million (Browne, 2018), which is the highest ever in e-commerce, and not just this, the legal provision behind this deal and the huge amount of criticism by traders all over India led to the involvement of government. Complaints have been filed before both the Competition Commission of India (CCI) and department of industrial promotion and policy by various organizations have also requested the government to intervene and prevent the proposed transaction assessing the effect on competition in the relevant market hence, broadly speaking, the larger the size of the relevant market, the smaller would be the effect, positive or negative, of the proposed transaction (Shahi, 2018). This issue becomes quite important in the present case.
Why Wal-Mart Chose Flipkart for the Deal
Such questions have been raised to understand why Wal-Mart has paid $16billion for a majority stake in Flipkart, India’s biggest online majority. Author has formulated the following reason for such an acquisition.
Demand: India is one of the most attractive retail market in the world, given its size and growth rate (Ray, 2018) as India is expected to have 475 million online shoppers by 2026 according to a report of Morgan Stanley and this acquisition allows the company (Walmart) to jump straight into small but growing e-commerce market with about 100 million customers. This deal is also new front in Walmart’s battle with amazon, the global leader in online retailer which accounts for 44% of the US e-commerce market.
Growth: Flipkart sold products worth a total of $7.5bn in the financial year that ended in March 2018 - the sales had grown by 50% since the previous year (2016). Its net sales, after discounts, returns and cancellation, were worth $4.6bn (Saxena, 2018). The deal still gives Walmart the fastest entry possible into one of the most promising, albeit difficult, e-commerce markets.
History: Venture capital firms Accel and Tiger Global invested more than eight years ago when Flipkart was valued at just $50m (Mishra, 2018) - and they have now exited with more than 400 times what they invested. The SoftBank Vision Fund led by Masayoshi Son was a big beneficiary of the deal - it had invested $2.5bn in August 2017 for a 20% stake and it exited with $4bn (Ray, 2018).
New Start of Companies
On 8 August, 2018 Competition commission of India, CCI approves proposed acquisition of Flipkart Private Limited by Wal-Mart International Holding, it has acquired a 77% stake (Chaudhary, 2018) inIndia’s largest ecommerce Flipkart, for $16 billion(Rs1.06 lakh crore).The deal will give the American retailer a direct link to a market that is expected to be worth $200 billion by 2026 (Tandon, 2018).This deal will provide various benefit to the consumers in India and also boost the economic deal in the country. “India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading the transformation of e-commerce in the market,” said Doug McMillon, Walmart’s president and chief executive officer (Abrar, 2018).
The intensity of mergers and acquisition is increasing with the de-regulation of various government policies as a facilitator of the new economic regime (Beena, 2008). The reforms process initiated by the Indian government since 1991, has influenced the functioning and governance of Indian firms (India P. C., 2015) which has resulted in adoption of different growth and expansion strategies by the corporate firms. These reforms have opened up a whole lot of challenges both in the domestic and international spheres (Singh, 2013). Such a deal is possible due to the change in the laws governing such acquisition and merger. Recent change in the schemes of Government includes measures to improve the ease of doing business, making it easier for entrepreneurs to start a business, reducing the length of procedures to obtain permits, protecting minority investors, easing trading across borders, and enforcing contract.
Challenges Faced by Both the Companies
Various traders and associations dealing in commerce think that this deal has more reason of downfall in terms of economy and uneven competition in India rather than producing any good. Many association have alleged that the $16 billion Flipkart-Walmart deal will create an uneven playing field in the country’s commerce sector. The Confederation of All India Traders (CAIT) said that the deal is nothing but a clear attempt to control and dominate the retail trade in India by Walmart through e-commerce in the long run (India P. T., 2018). RSS-affiliate Swadeshi Jagran Manch alleged that “this merger will further eliminate small and medium businesses, small shops, and opportunity to create more jobs, they further stated that many most of the small entrepreneurs are already battling for their existence, entry of Walmart will create problems for them.” (Sen, 2019) On the other hand Walmart projections suggest that this deal alone can create 10 million jobs through partnerships with locally owned businesses, boost farmers’ income, create more efficient agriculture supply chains through introduction of digital technology, improve service delivery and access for consumers, and support initiatives like Skill India and Startup India.
Competition commission of India is a statutory body of the government of India responsible for enforcing the competition act,2002. CCI look into what comprised anti-competitive practices and entry barriers, among others in such transactions. The CCI dealt with the question if indeed the Walmart-Flipkart combination was altering the competition both in the horizontal and vertical markets. In competition parlance, a horizontal overlap is a merger between two competitors in similar line of business, while a vertical overlap is a merger between a manufacturer and distributor, who are at different stages of production chain in different markets. Needless to say, the Walmart-Flipkart deal has a horizontal overlap as both the companies are in the wholesale cash and carry of goods (B2B market). Considering the facts on record and the foregoing assessment, the commission is of the opinion that the proposed combination is not likely to have an appreciable adverse effect on competition in India and therefore, the same is hereby approved in terms of Section 31(1) of the Act,” CCI said in its ruling.
Foreign Direct Investment:
In the present deal of Walmart- Flipkart, and CCI as a statutory body, had the final say in the present proposal. In terms of the Act, a combination is assessed on the basis of whether or not it causes “appreciable adverse effect on competition' in the relevant market in India (India, 2018).CCI further said that “in the foreign direct investment (FDI) policy for an e-commerce platform cannot influence market prices directly or indirectly” (India C. C., 2018).
From the order passed one can analyze that both the parties are engaged in B2B sales, the combination would facilitate B2C sales for Walmart (India C. C., 2018). Coming to the question of vertical overlap, the FDI policy restricts both the parties from engaging in B2C sales. However, there is no restriction on the parties to offer an online market place where they function merely as intermediaries as per FDI policy, author has illustrated the point below. Flipkart is engaged in this kind of sales through its online platforms, namely Myntra.com, Jabong.com and Flipkart.com while on the other hand Walmart has no presence in any online market place for B2C sales. Taking into account of a Press note 3that the Commerce ministry had issued under the Consolidated FDI Policy Circular 2015 which was passed in 2016 regulating the FDI norms circumscribing the e-commerce Industry. (Gupta, 2018)
V. Paradox In The Deal Relevant Market
The order of the Competition Commission of India (“CCI”) in All India Online Vendors Association (“AIOVA”) v. Flipkart India Private Limited (Case No. 20 of 2018) (“Flipkart”) dated 6 November 2018.(Samarth Saxena, 2018) is highly criticized by traders pan India. In the above stated order the CCI’s take on relevant product market analysis has been a confusing one. Author has illustrated the point by different case to case analysis. Bigger question is whether the proposed combination is resulting in elimination of any major player in the relevant market. Before proceeding further we need to know to understand what relevant market is. This is defined in CCI act as- “the market which may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets” under section 2(r) of the Act. Therefore, for any enterprise to abuse its dominance, it will have to be dominant in its ‘relevant product market’ given under section 2(s) of the Act defined as “means a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use” as well as ‘relevant geographic market’ defined under section 2(t) of the Act as “means a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighboring areas” A significant increase in price in one segment shall cause the buyer to shift to the other segment and therefore, “the offline and online markets are different channels of distribution of the same product and are not two different relevant markets” (Ashish Ahuja v. Snapdeal and others, (Case No 17 of 2014)). According to the order, Walmart and Flipkart have not made a distinction between organised and unorganised cash and carry of goods (B2B sales) and considered both these as part of one relevant market.(India P. t., 2018)given the small size of Walmart India's B2B sales business in India, a narrower delineation of the identified relevant market was considered unnecessary by the Commission.(Parmita Pal, 2018)With respect to direct sales to consumers ('B2C sales'), it was noted by the Commission that both Flipkart and Walmart India cannot engage in direct sales to consumers on account of restrictions under the Foreign Direct Investment ('FDI') policy (India P. t., 2018).
CCI examined the proposed combination from the perspective of both horizontal overlap and vertical overlap. In the case of horizontal overlap CCI declared that the Proposed Combination is not likely to have any adverse implication on competition irrespective of the whether the market is taken as all B2B sales. Accordingly, the relevant market for B2B segment is left open. With respect to B2C sales, Walmart has submitted that the FDI Policy restricts the parties from engaging in business to consumer sales and thus, they are not engaged in the said segment. This deal has faced much ire of the small and domestic retailers as they have alleged violations of FDI norms by creating a de-facto inventory model by procuring large sums of goods from their own subsidiaries and group companies as Flipkart is an inventory model e-commerce, which means the marketplace owners owns the products and also manages the complete end-to-end sales process. The inventory of the goods is owned and sold by the ecommerce entity directly to the customers thereby violating 25% sales from a single vendor or group companies rule set under the Press Note.
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