Myntra ties up with new seller to comply with FDI regulations

Myntra has started working with a new seller called Tech Connect Retail, owned by former Bharti Airtel CEO Sanjay Kapoor


Photo: Bloomberg
Photo: Bloomberg

Online fashion retailer Myntra has started working with a new seller called Tech Connect Retail Pvt. Ltd, owned by former Bharti Airtel Ltd chief executive Sanjay Kapoor, as it seeks to comply with new regulations for e-commerce firms, according to four people familiar with the matter and official documents.

So far, Myntra has generated the majority of its sales through Vector E-commerce Pvt. Ltd, a seller with which it had close connections. Since India has barred direct online retail, e-commerce companies such as Myntra have complex structures that involve separating their businesses into purportedly independent entities.

As of late evening on Sunday, Vector E-commerce had completely disappeared from Myntra’s app and website as a seller. The majority of Vector’s business is currently handled by Tech Connect, as per the website and the people mentioned above.

Myntra until now operated under the B2B (business to business) to B2C (business to consumer) structure, under which its parent entity, Myntra Designs Pvt. Ltd, supplied products to Vector, which in turn sold them to the final customers. Myntra and Vector worked closely—until February, one of Vector’s owners, Prabhakar Sunder, was also the chief financial officer at Myntra.

Such a structure may potentially violate new laws introduced in late March, which allowed foreign direct investment (FDI) in online marketplaces but capped the contribution of a single seller to 25% of the site’s overall business, said the four people cited earlier.

Myntra, which is owned by Flipkart, has started working with Tech Connect to reduce its dependence on Vector and adopt a marketplace structure, at least on paper, the people said. Myntra may work with more such sellers later this year, they said. A cursory look at Myntra’s site shows that many products are now sold by Tech Connect.

The company is considering moving some Vector employees to Myntra Designs, according to one of the four people, all of whom requested anonymity.

“(Myntra’s earlier) structure could have been easily challenged legally. The law clearly states that the two entities—one that had foreign direct investment and the one that sells to the consumers—need to keep an arm’s length distance,” said this person.

Following the introduction of the new rules, Mint reported that e-commerce firms such as Jabong and Myntra will be forced to rework their already complex corporate structures that deploy a mix of inventory and marketplace models. Recently, online retailer Jabong (which was acquired by Myntra last month) also moved to a marketplace model by creating three vendors—Bren Trading Pvt. Ltd, Ravenna Fashion Pvt. Ltd and Wearhouse Products Pvt. Ltd.

Flipkart, too, has identified at least four sellers to meet the government’s norm of capping a single seller’s contribution to overall revenues at 25%.

Tech Connect is owned by Sanjay Kapoor and his wife Seema Kapoor. The couple has together invested about Rs.1 crore in Tech Connect as initial capital, according to documents filed with the Registrar of Companies.

“Online commerce is a growing segment and I wanted to participate in the growth story,” Sanjay Kapoor said over the phone. Kapoor and his wife are only investors in the firm and there is a team of about eight professionals who run daily operations, he said.

Tech Connect was incorporated in 2010 as August Paper Works Pvt. Ltd by Shweta Bharti and Manoj Kumar (both are advocates with legal firm Hammurabi and Solomon) and was in the business of manufacturing, importing, exporting and dealing with paper and paper products. In December 2015, it adopted a new name, Tech Connect Retail, and ventured into online trading and marketing, as per the official documents. In February, the Kapoors picked up a majority stake in the firm and joined the board.

Myntra declined to comment for this story.

“The new FDI clarification has given legal shape to the marketplace structure; this has, in some respects, made it easier to understand which parts of a structure are allowed and which are not,” said Avimukt Dar, a partner at law firm IndusLaw. “The 25% limit per seller, for example, allows for a simple compliance threshold. While grey areas remain and e-commerce structures need continuous tweaking in line with best practice, the legal understanding of the marketplace model is much clearer than it was at the beginning of 2016.”

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