New Delhi: One summer afternoon in 2011, Praveen Sinha, a consultant at McKinsey and Co., met his business school batchmate Deepak Dhamija, who was running a legal and financial consulting firm called Aristotle Consultancy Pvt. Ltd.
Sinha was still bitter about the closure of Asasa, the online retailer funded by Rocket Internet (a Berlin-based incubator famous for churning out copycat start-ups based on successful US tech firms), because it wasn’t compliant with India’s investment laws. Sinha was one of the co-founders of Asasa. All his life, he had wanted to be an entrepreneur. His two years at the Indian Institute of Management (IIM) Calcutta (between 2006 and 2008) had been spent building a network of people that could help him do that. He was a popular man on campus, say friends. He would host poker parties in his room where, over cards and hookah, the guests would discuss business and philosophy with the host.
That day in 2011, over cigarettes, Sinha and Dhamija discussed Asasa, Rocket Internet and India’s laws. Dhamija offered to help create a structure that could allow Rocket Internet to re-enter India.
Sinha was pleased—in part because his entrepreneurial ambitions had acquired a new lease of life and, in part because the network effect had paid off. He introduced Dhamija and his co-founders at Aristotle, Aniket Kumar and Sanjeev Lamba, to Rocket Internet, which was still keen on India.
Aristotle had closely studied structures of Flipkart, Myntra and Bharti-Walmart to understand how to incorporate a legal structure compliant with Indian laws, which did not allow foreign direct investment (FDI) in multi-brand retail and online retail.
The key to this, Aristotle said, was an Indian partner.
Around the same time, in another part of the world, Arun Chandra Mohan, another co-founder of Asasa who was now working with Rocket Internet’s international operations, was introduced to Ashish Choudhary at a party in London. Choudhary was everything Rocket was looking for in an Indian partner, a rich businessman of Indian origin, a risk taker and someone who was open to Rocket’s terms: deploy money at a promised rate of return without interfering in day-to-day operations.
Everyone met everyone else and an understanding was reached between Mohan, Choudhary, Sinha, Aristotle and Rocket within months. Choudhary was promised two things: he would not lose the capital he invested in the front-end entities and the return would be way higher than if he parked the money in a bank. Sinha was to be co-founder.
The partners moved fast.
By September 2011, Xerion Retail Pvt. Ltd—the front-end company promoted by Choudhary—had been incorporated.
Rocket decided to use Jade eServices Pvt. Ltd, a company incorporated when it had launched Asasa.com, as the wholesale arm, into which Rocket would pump in foreign capital. This would be the model Rocket would follow for most of its investments in India—a wholesale or back-end arm in which it invested through a subsidiary or special purpose vehicle (a company set up specifically for a purpose), a front-end promoted by an accommodating partner in which it had no stake (but enjoyed rights), and a bunch of employee co-founders.
The partners came up with a brand name, Jabong.
By December 2011, Jabong had a beta website.
Rocket once again had a presence in the world’s fastest growing Internet economy.
Now, five years on, Rocket’s clever structure has turned out to be its nemesis: the literal and metaphorical roots of Rocket’s problems in India.
By adopting this structure, Rocket was parking its cash and hopes in the control of entities and people that it did not necessarily know too well, and over whom it had limited control. Rocket is known for outsourcing entrepreneurship; in India, it ended up outsourcing ownership. Even as Rocket pushed its hired-gun entrepreneurs to achieve fast revenue growth, it ignored the basics of building companies: controls and processes, especially where the spending of money is concerned; sound audits; and good corporate governance practices.
This is a story of how a global Internet giant run by three brothers, smart operators, met their match in a bunch of young hired guns, whom they sometimes ignored, sometimes respected, sometimes commanded, but always underestimated.
The rise of Sinha—the Javas story
In many ways, Rocket Internet’s story in India is also the story of Sinha, now 35. Sinha, Mohan and Lakshmi Potluri were the original trio assigned to run the company. All were designated co-founders and promised a small stake in Jade. On paper, Sinha does not hold any stake in Xerion. The man himself denies any connection with Xerion.
Sinha was in charge of operations, Mohan, procurement and merchandising, and Potluri, marketing. Potluri left after a few months and she was replaced by another consultant from McKinsey, Manu Kumar Jain, who was also Sinha’s senior at IIM Calcutta.
For some time, Sinha was just like any other employee in Jabong, though with a fancy designation, co-founder and managing director. He didn’t have a direct line to the Samwer brothers of Rocket Internet, nor did he have powers to make key decisions concerning Jabong. In 2012, he was not even paid half of what Mohan was earning. “Mohan’s salary was higher than Sinha and Potluri’s combined,” said an executive at Aristotle, who spoke on condition of anonymity. It was only in 2013 and after the sudden success of the logistics operation Javas that Sinha was given a raise—his salary went up to Rs82.5 lakh a year. Mohan earned over Rs1 crore.
Mohan was the real power centre at Jabong. He was Oliver Samwer’s trusted lieutenant. All calls related to Jabong were taken by him and Mato Peric, group managing director and partner at Rocket Internet Berlin, who was sent to India to launch Jabong.
In short, Rocket called all the shots, at least in the initial years.
Whether it was hiring, office space, budgets or day-to-day operations, Rocket had its men who kept a close eye on businesses. And it was made clear to everyone that growth was the overriding priority. After all, Rocket wanted to sell Jabong to Amazon before the latter grew big in India.
Peric was in India for almost a year and despite the fact that he was on a business visa, he was effectively running the Indian business.
“Mato was like a ghost. Since he was on a business visa, he was not officially allowed to have any operational responsibility, but he did. One cannot find a single document signed by him during the span he was in India,” said an employee who worked closely with Peric.
Peric would give instructions verbally or at best jot them down with a pencil. The Indian managers at Jabong would go on to do the same, one reason why there is no real documentary trail of what went down at Jabong.
While Peric focused on Jabong, another Rocket Internet hire, William Pearce, took care of FabFurnish, HeavenandHome and Printvenue, among others, from November 2011 to September 2012.
Since Peric was shuttling between Germany, London and India, he hired his friend and colleague from McKinsey, Heavent Sudhir Malhotra, as the managing director of Rocket E Services Pvt. Ltd (a subsidiary of Rocket International) to take care of all key Rocket businesses in the country as a sort of country manager.
Mohan liked Sinha and trusted him.
Jabong was created straight out of Rocket’s playbook. The technology and systems were all plug-and-play. Rocket Internet expected companies in India to work with multiple third-party vendors for logistics and warehousing services just like it was doing in Europe. However, India was (and is) different. The infrastructure was poor and e-commerce was being restricted by the lack of logistics and digital payment services. Warehousing companies did not exist.
Large courier companies such as Blue Dart and FedEx were not ready to customize their services for e-commerce firms.
In response, Flipkart had already launched its in-house logistics unit and Sinha was trying to convince Rocket to let Jabong have its own fleet of delivery personnel and a centralized warehouse that would be used to stock, pack and ship. This would result in significantly improved customer service and give Jabong an edge over rivals, he argued.
Logistics back then was open to FDI although it meant seeking permission from the Foreign Investment Promotion Board (FIPB). This was a time-consuming and long process. According to Aniket Kumar, co-founder of Aristotle, his firm had suggested that Rocket via Jade could invest in Javas through the FIPB route. However, Rocket wasn’t convinced and sought advice from another law firm.
This was the time when Amazon too had applied for setting up Amazon Transport Services to FIPB. But eventually, Amazon put its plans on hold, waiting for the sector to open up.
Whether it was due to the fear of regulations or something else, Rocket did not invest in Javas.
Rocket was not a fan of operational-heavy business models and was resisting the change. Around April-May 2012, Sinha flew to Berlin to meet the Samwer brothers and pitched them the idea of a logistics unit—Javas (Jabong Value Added Services). “Rocket understood only one language—Copy! It wanted to know which global model Javas was a replica of. It was nervous about creating something new,” said one of the founding team members at Jabong.
After some persuasion, Rocket agreed to a trial, but asked Sinha to go out and find investors to fund his idea.
Sinha turned to his list of potentially useful people. It had only been a few months, but he had already managed to get to know Choudhary well. Sinha approached Choudhary with the idea. Choudhary offered a loan (the amount is undisclosed) to start Javas and the logistics operations took off as a part of Xerion Retail by mid-2012. On 31 July 2012, Xerion altered its MoA (memorandum of association) to add logistics as part of its business. Sinha did not have any equity in Javas at this stage. Vijay Ghadge, who had moved to India from London Business School to take care of Jabong’s operations in December 2011 (he was hired by Sinha and Peric), was asked to lead the Javas operations and expand swiftly.
It was the success of Javas and Jabong’s massive warehousing facility in Pataudi (Haryana) that made Rocket start taking Sinha seriously.
Xerion continued to operate out of Jabong’s office in Udyog Vihar, Gurgaon. At the same time, there were certain senior employees at Javas who were on the payroll of Jade. The maze that Rocket created to evade investment laws was becoming complex.
But business was booming. Jabong’s customer service levels were among the best in the industry and its innovative products such as open delivery (where customers could open, try a product and then pay for it) were setting new benchmarks in e-commerce. Jabong was growing at a pace that even Rocket had not anticipated.
Between 2012 and 2013, Jabong’s sales soared 3,767% to Rs146.6 crore.
At a townhall in Jabong’s Gurgaon office in 2012, Oliver Samwer spoke about the success of Javas and how the last-mile delivery model would be replicated in Indonesia, Dubai and Africa.
Sinha was celebrated internationally within Rocket for rolling out Javas and building proprietary warehouses, which had given Jabong a massive lead over other online fashion retailers. He was asked to travel to various countries to share his knowledge with other Rocket companies on how Jabong had built self-logistics and warehousing.
Sinha’s star was shining.
By the middle of 2013, Sinha started to oversee the finance and accounting department, too.
During the same time, the logistics sector had opened up for FDI and it was decided that Javas could be spun off and use external funds to grow further.
In May 2013, Quickdel Logistics Pvt. Ltd was incorporated as a separate entity. The entire staff of Javas, which had been rechristened GoJavas, was moved from the payroll of Xerion to that of Quickdel. Apart from Choudhary, his father Randhir Singh and a family relative Abhijeet Singh were shareholders in Quickdel. Subsequently, Sinha bought a 50% stake in Quickdel from Abhijeet Singh. Rocket Internet was not a shareholder in a business that had grown to $200 million only because of business from Jabong, which it owned.
Was this Rocket’s way of rewarding Sinha, who had no stock options in Rocket and a minimal stake in Jade? Or was it a sheer miscalculation on the part of Rocket, which never anticipated that so much value would be created in a logistics business. Or was it the fact that Xerion-owned Javas and any transaction between Xerion and Rocket at a time when the German company was readying for an initial public offering (IPO) would have attracted undue attention from regulators? Interestingly, around the same time, Rocket appointed Ernst & Young (now EY) to audit and confirm that it was compliant with International Financial Reporting Standards.
The rise of Sinha—spreading out
By the end of 2013 and the start of 2014, things were changing for Rocket. Oliver Samwer was on the road to raise money; his entire focus was on that.
There was no Rocket Internet executive from Germany in India at the time. Peric and Pearce had quit Rocket. India was entirely run by Malhotra, Mohan and Sinha.
It was only a matter of time before Sinha clashed with Mohan. Sinha wanted to cut costs but Mohan preferred focusing on growth. The two often had disagreements. Jabong’s cash burn was high—brands were being signed at higher rates than industry standards and marketing spending was massive.
Sinha decided to create separate entities within Jabong to try and reduce costs. One such was Moksha Designs Pvt. Ltd, which did fashion shoots for Jabong. Around 200 people working in-house on fashion shoots were moved to Moksha, which was incorporated by Prafulla Rocky and Shashi Kumar, both employees of Aristotle. While Sinha and Mohan did not have any stake in Moksha on paper, it is not clear if the Aristotle employees were the real stakeholders or holding shares on behalf of someone else. What is clear, however, is that Rocket did not have any stake in it.
“When we started, photo shoots were handled by the operations team that had no idea about what they were doing. There was no finesse, no creativity…I had to get reshoots after reshoots done to make pictures look presentable,” said one of the first employees at Jabong, a category head. “Things improved once Moksha went into the hands of professionals.”
By December 2014, Rocky and Kumar had transferred their stake to Sajan Gianchandani and Kabir Singh. The details of the transactions are not known.
Today, Moksha has become one of the trusted studio partners for several e-commerce firms including Amazon India, Paytm and Snapdeal. Moksha owed its success to Rocket, which was, again, not going to benefit because it didn’t hold any stake in the company.
Similarly, Sinha was highly appreciated by investors and the board for introducing a non-banking financial company, Pinnacle Capital Solutions Pvt. Ltd (Pincap), to Jabong and its suppliers. Pincap essentially helped Jabong with its working capital needs and in getting additional cash discounts from the brands. For instance, if Jabong wanted to purchase Rs10 crore worth of inventory from brand XYZ, it would, with the help of an unsecured loan from Pincap, offer to pay the amount upfront in exchange for a 3-5% cash discount.
Pincap was promoted by Sinha’s in-laws—the Taunk family.
It isn’t clear if Sinha had a stake in the firm. But there is no doubt that it helped Jabong’s cause.
“In 2012, none of the banks wanted to work with e-commerce firms. We had no collateral to offer for the loans and our business was still very small for any big bank to provide us with working capital loans. We were rejected by several. It is then that Praveen took help from his father-in-law, who was running a financing firm,” said a senior executive in the finance team who spoke on condition of anonymity.
Many of these relationships would come back to haunt Rocket, but at the time, the board of Jade, which included Mohan and Malhotra, did sign off on all of them. However, most of the senior management that Mint spoke with claim that they were not aware of Sinha’s personal connection with Pincap and others.
Still, in late 2014, Sinha’s glory run came to an abrupt end. Rocket Internet and Jabong’s other investor Kinnevik decided to form Global Fashion Group (GFG), an international group of six online fashion stores, and Jabong’s control went to the management team of GFG.
GFG was eyeing profitability ahead of a forthcoming IPO. This meant tighter controls and more scrutiny.
And eventually, it would mean a great unravelling.
It didn’t take long for GFG to decide it didn’t want Jabong, which was making losses.
“The decision followed a strategic review of the Indian operations. The GFG board concluded that Jabong’s position as India’s leading fashion e-commerce destination would be best served through a business combination with a local player,” a GFG spokesperson said in an email response in early September.
Soon, GFG was questioning every decision made by Sinha and Mohan. Not content with current decisions, GFG decided to look at the older ones too. It didn’t like the fact that Jabong had offices in Europe. Nor did it like what it saw of the website’s private label business. Both had been Mohan’s decisions. GFG was also not comfortable with the structure. It took GFG time to understand the Jade-Xerion structure.
By then, rumours started circulating in e-commerce circles about potential governance issues in Rocket companies—mainly Foodpanda and Jabong.
The murmurs in Jabong became stronger when online marketplace Snapdeal (run by Jasper Infotech Pvt. Ltd) acquired a minority stake in GoJavas. Senior employees at GoJavas, who had been promised equity and stock options in the company, claim that they discovered Sinha’s substantial holding in GoJavas only after the deal.
Sometime in 2015, GFG undertook an audit of all companies in its fold.
“GFG took everything from Rocket and Kinnevik on face value. The audits were done only later as part of basic hygiene,” said a GFG senior executive who spoke on condition of anonymity.
Still, the usual audit turned up some unusual red flags.
GFG’s board asked its chief financial officer Nils Chrestin to spend time in India understanding how Jabong worked and to investigate the issues highlighted by the audit.
He had another task too—finding replacements for Sinha and Mohan. Both had seen the writing on the wall after GFG took control. Mohan had resigned and was on his way out. Sinha too had resigned but was staying on till a new chief executive was found. In November 2015, Sanjeev Mohanty, then managing director at Benetton India, was appointed as the new CEO.
Before Mohanty took charge, a whistle-blower at Jabong alerted Chrestin about the company’s weak processes and internal controls. In September 2015, Mint investigated the utter lack of processes at Foodpanda.
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Unlike Rocket, which mostly cared only about growth and later cost metrics, GFG was concerned with the alleged lack of processes. And so, it hired a Big Four audit and consultancy firm in Stockholm to conduct an internal review.
Until then, while there had been rumours about Rocket Internet and the people who were running its various businesses in India, there had been no allegations of wrongdoing.
Sure, there were gaps, but most of these were strictly procedural. For instance, Rocket companies in India received money from Germany on a monthly or quarterly basis. While the money was reported to FIPB, most approval letters from the Reserve Bank of India were missing, according to a report prepared by lawyers involved in the due diligence of Jabong before its eventual sale.
The report also adds that Rocket frequently ran into tax issues with state authorities. Taxes were not paid on time or were inaccurately calculated and paid.
Then, these are not problems unique to Rocket and its various businesses in India.
Indeed, none of the statutory auditors who audited the books of the various Rocket firm in India had anything to say.
Several senior executives at Jabong and Rocket Internet confirmed that Rocket and Kinnevik conducted quarterly audits using firms that they had separately appointed.
The boards of the companies had nothing to say either.
A review, therefore, caused a stir.
“Just so that you are aware, Jade (the company owning the brand name of ‘Jabong’) was always audited by a Big Four audit firm (since inception), and never faced any questions of financial or ethical irregularity as alleged during the time I was involved in the company,” said Sinha in response to an email query from Mint.
The Stockholm-based audit firm went into classic forensic mode—instructions were sent on data capture and destruction; people were grilled; and all payments, over time, were reviewed.
Still, the probe appeared selective.
GFG requested the audit firm to not worry about Rocket Internet’s Malhotra too much. Indeed, while all data from Sinha and Mohan’s computers were reviewed, GFG specifically asked that data from Malhotra’s not be. That’s strange because Malhotra was Rocket’s key employee in India, and his involvement, and relationship with Sinha and Mohan, would have been crucial to the probe.
GFG also asked the audit firm to ignore Xerion.
“Following our joint discussion with GFG, it was being agreed that an inspection of Jabong’s B2C operator Xerion’s accounts was to be initiated as it was expected that Xerion have significant interactions with the third parties which is of key interest of the investigations such as Quickdel, GoJavas and whether Xerion via its third parties potentially may have acted against Jabong’s interests. GFG asked us, however, in late November 2015 not to progress with this inspection,” the audit firm said in a document.
GFG and the investors Kinnevik and Rocket were perhaps aware that opening Xerion’s books would blow the lid off a bigger mess that Rocket itself had created.
“At some point, they had to weigh the consequences. Getting deeper into the investigation of Xerion would have increased the risk of non-compliance with Indian FDI laws and that was a bigger problem than the crores that were (allegedly) siphoned off,” said the Aristotle executive.
To be sure, non-compliance with FDI laws could have made the Enforcement Directorate slap a notice of over $1 billion in penalties on Rocket. The penalties, as per Indian law, could be three times the total investments deployed without compliance.
Mint reviewed the 32-page report by the Stockholm-based audit firm and verified its authenticity before using excerpts from it.
Nowhere does the report accuse Sinha of fraud, though it does raise several instances where Sinha and Malhotra could have had a potential conflict of interest by getting Jade or Xerion to do business with companies owned by their family or friends.
It also highlights several strange goings-on in Rocket’s businesses in India.
According to the report, Moksha Designs (the photo studio which was spun off as a separate entity in 2013) was brought into Jabong’s radar by Malhotra.
“Moksha was initially brought into the Jabong radar by Mr Malhotra as he is perceived to be friends with Sajan Gianchandani & Kabir Singh Kochhar, the founders of Moksha. Furthermore, we understand also that Mr Chandra was established as the contact person for Moksha and Mr Sinha was aware about the entire set-up and dealings with Moksha,” the report stated. The forensic report refers to Mohan as Mr Chandra (his full name is Arun Chandra Mohan).
The report also comments on Sinha’s involvement with GoJavas while being the managing director of Jabong and Jabong’s working relationship with Pincap, the company owned by Sinha’s in-laws. Unless approved by the board, such transactions are an offence under India’s Companies Act.
It adds that Pincap allegedly received an unwarranted and non-collateralized loan of around $10 million from a business partner of Jabong. However, there are no further details available on this.
Within two years of inception, Jabong had created a network of companies just like Rocket Internet had. Most of these companies were officially floated by Aristotle and had Aristotle employees as board members, even shareholders. Moksha Designs, Value Shoppe (Value Shoppe Pvt. Ltd, a company which was primarily into buying surplus stock and scrap from Jabong), LSD Infosolution Pvt. Ltd, and Larissa Apparel and Trading Pvt. Ltd are among the few such companies that Mint came across during its investigation.
And there were some strange facts that raised several questions about Jabong’s operations. For instance, a junior-level Jabong employee, Upender Bhardwaj, who managed house-keeping activities, was also the director of Value Shoppe. It is not known how Bhardwaj went on to become a director in the company.
In July this year, Flipkart, which also owns Myntra, the country’s largest specialty online fashion retailer, bought Jabong in what was almost a distress sale for $70 million, a steep fall from the $508 million the site had been worth in December 2013. Kinnevik and Rocket Internet, the promoters of Jabong, took a massive haircut, but were probably happy to see the close of a sale that has been in the making for more than a year and which, at one point, looked like going nowhere.
Flipkart moved fast, sealing the deal in just three days and under the nose of then front-runner Snapdeal. While Snapdeal was nervously weighing the consequences of acquiring Jabong with the company’s existing business structure, pointing to regulatory issues and seeking answers to alleged corporate governance issues reported in the media, Flipkart went ahead.
“In line with our previously stated strategy, GFG has a strong focus on accelerating its path to profitability. The transaction will de-consolidate our highest loss-making operation while delivering capital that can be deployed in high-return opportunities across GFG’s footprint,” the GFG spokesperson said.
Mihir Dalal in Bengaluru contributed to this story.
First part of the Rocket Internet series: The rise and fall of Rocket Internet in India