The sale of Flipkart is not just the sale of one company. It is the beginning of a new tomorrow. It is just that one cannot be sure whether that tomorrow will be better for India than today
When Carl Douglas McMillon, president and chief executive officer of Walmart Inc, arrives at the Embassy Tech Village headquarters of Flipkart in Bengaluru later on Wednesday to acquire India’s first-to-a-billion-dollars-startup, he will be accompanied by Walmart International’s Judith McKenna and CEO (commerce) Marc Lore. It will be a triumphal return to India for the Bentonville, Arkansas-based retailer which will be partnering Google’s parent Alphabet Inc in a deal estimated at $18-20 billion enterprise value – Walmart will own about 60 per cent stake, and Alphabet will get to own about 15 per cent of the online market place.
The passage of the past five years has obviously dulled memories. All recent media reports seem to have conveniently glossed over the history of Walmart’s previous foray into India, in partnership with Sunil Mittal’s Bharti group. Walmart in 2012 launched a global review of corruption after a New York Times report on bribery at the company’s Mexico operations. The review by its lawyers flagged India among the countries with the highest corruption risk. The US Foreign Corrupt Practices Act forbids American firms from paying bribes. Almost on cue, in November that year, Bharti Walmart suspended a number of employees, including the chief financial officer, as part of an internal investigation into bribery allegations in the Indian operation. By June 2013, Raj Jain, the CEO of the India operations, quit after six years at the helm of the company. It did not take much time thereafter for the Walmart-Bharti JV to fall apart.
One hopes that this time around Walmart has done enough due diligence before committing to the deal. One hopes that someone has told Carl Douglas McMillon (Doug to friends) that when Flipkart-owned Myntra acquired fashion e-tailer Jabong from the troubled Rocket Internet, Jabong was facing a huge number of corporate governance issues. Hope Doug has made sure that there are no troublesome skeletons from the past that might come in the way of US laws that Walmart likes to be governed and guided by, because of Jabong’s past.
Also, Doug must surely have been apprised that earlier this year Flipkart lost an appeal against the income-tax department over the reclassification of marketing expenditure and discounts as capital expenditure, which will surely involve substantial tax liabilities from the past. Just for Doug to know, this ruling was made in December last year, and the issue involves money spent by e-commerce companies on marketing through deep discounts. Flipkart (and Amazon, too) has been classifying these discounts as marketing expenses and deducting them from revenue, leading them to posting losses and, therefore, not being liable to tax. The tax department, however, contends that this is not a cost but a capital expenditure which means it should not be deducted from revenue. This issue of deep discounts might need further briefing to Doug as the Confederation of All India Traders (CAIT), an umbrella association representing millions of India’s small traders, has also been demanding government scrutiny of Flipkart’s predatory pricing through deep discounts. So, Doug does need to know that while he is taking ownership of India’s largest e-tailer, there are issues from the past that might somewhat temper the euphoria.
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