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Amazon’s stake in seller may come under scrutiny

Amazon Asia and Catamaran Ventures have jointly formed an entity called Cloudtail India Pvt. Ltd to sell items such as books, phones and exclusive Amazon merchandise on Amazon.in under the seller name Cloudtail, according to documents available with the Registrar of Companies (RoC). Photo: BloombergPremium
Amazon Asia and Catamaran Ventures have jointly formed an entity called Cloudtail India Pvt. Ltd to sell items such as books, phones and exclusive Amazon merchandise on Amazon.in under the seller name Cloudtail, according to documents available with the Registrar of Companies (RoC). Photo: Bloomberg

The e-commerce firm is selling products on India website through joint venture with Narayana Murthy's Catamaran Ventures

Bangalore/New Delhi: Amazon is selling products on its Indian website that are sourced by a joint venture with N.R. Narayana Murthy’s Catamaran Ventures, an arrangement that could draw regulatory scrutiny on the world’s largest online retailer that is already facing an inquiry for possible violation of foreign investment rules in India.

Amazon Asia and Catamaran Ventures have jointly formed an entity called Cloudtail India Pvt. Ltd to sell items such as books, phones and exclusive Amazon merchandise on Amazon.in under the seller name Cloudtail, according to documents available with the Registrar of Companies (RoC).

Cloudtail India is a fully owned unit of Prione Business Services Pvt. Ltd, the documents show. Prione, in turn, is owned by Catamaran Management Services Pvt. Ltd, the acting trustee of Hober Mallow Trust (51%), Amazon Asia Pacific Resources Pvt. Ltd (48%) and Amazon Eurasia Holdings (1%).

Catamaran is the family-owned fund of Infosys Ltd co-founder Murthy. Mint couldn’t independently verify whether Catamaran Management is completely an Indian fund or has any foreign capital.

Companies such as Amazon and Flipkart, India’s biggest online retailer, operate through marketplace platforms that connect small merchants with buyers, unlike in the West where 60% of products sold on Amazon are those it has sourced itself. The change in the business model has been prompted by local regulations that bar Amazon and e-commerce websites controlled by overseas entities, including Flipkart, from selling their own inventory directly to consumers.

Under such a structure, Amazon and other websites need to keep an “arm’s length distance" with their sellers. The arm’s length principle means that e-commerce sites shouldn’t have control over the business practices of their sellers, which need to operate independently.

But Amazon’s sizeable ownership in the entity that controls Cloudtail can give the online retailer a say in Cloudtail’s operations.

Apart from Amazon’s ownership in Prione, two senior executives from Amazon India sit on the boards of Prione and Cloudtail, the documents cited above show.

Amazon India country head Amit Agarwal and finance director Raghava Rao were appointed as directors of Prione (which was called Tauras Business then) on 5 June. Prione’s other board members are Catamaran head Arjun Narayanaswamy and former Infosys senior vice-president and general counsel Radhakrishnan Nithyanandan.

On 18 July, Amazon executives Agarwal and Rao, along with Nithyanandan, who runs a legal advisory firm called Brown Tree Consulting, and Catamaran’s Narayanaswamy were named as board members of Cloudtail. They were joined by Catamaran director Lakshminarayan Kalpathy Ganapathi.

Delhi-based Cloudtail India was incorporated in October 2011 by the name of Sparrowhawk Sales and Marketing Pvt. Ltd. The name of the company was changed to Cloudtail in August 2012. Cloudtail twice increased its share capital over the past two months. On 29 July, the company increased its capital to 100 crore from just 5 lakh. Then, on 3 September, Cloudtail tripled its authorized capital to 300 crore and had paid-up equity of 100 crore.

On 23 July, Bahl Chandhoke Chartered Accountants, the statutory auditors of Cloudtail India, resigned. Bahl Chandhoke said its resignation was on account of the new Companies Act, which restricts the numbers of firms an auditor can sign up with.

Catamaran Ventures said in June that it signed a partnership with Amazon.in to help India’s small and medium enterprises take their businesses online. Cloudtail, however, is currently selling directly on Amazon.in.

An Amazon India spokeswoman directed Mint queries to Prione. A Prione spokesman confirmed that Cloudtail India is owned by the Indian subsidiary of Prione Business Services and said Cloudtail “is an independent arm’s length seller on the platform".

On the other hand, Cloudtail has its own chief executive officer (CEO) and all decisions are taken by its management team under the oversight of the company’s board, the spokesman said.

“The shareholding of Amazon is limited to Prione Business Services Private Limited. All the directors of Cloudtail are appointed by Prione. Cloudtail is just another seller on the platform and the arm’s length is maintained by offering the same commercial terms and conditions of selling on the platform as other sellers," the spokesperson said.

Prione has helped more than 3,000 small and medium independent merchants to become sellers on the Amazon.in platform and these services include helping sellers develop their online catalogue, the spokesperson said.

Prione declined to name the company’s CEO, its senior management team and employee strength.

Amazon and several other e-commerce sites including Snapdeal, Jabong and Myntra (now owned by Flipkart) were asked to provide more information about their business models by the country’s Enforcement Directorate (ED) earlier this year, two people familiar with the matter said. That inquiry wasn’t related to Amazon’s ownership in Prione, which took shape since May, the people said. An Amazon spokeswoman said the company is in compliance with foreign direct investment regulations.

To be sure, there may be nothing illegal about this arrangement and structure, although it leaves a lot to interpretation. And Amazon is hardly the only e-commerce firm that has created a complex structure to try and comply with laws.

India’s largest e-commerce firm Flipkart has run into trouble with the ED because of its alleged control of its main seller WS Retail Services Pvt. Ltd before 2013.

WS Retail, a seller on Flipkart, was owned by Flipkart co-founders Sachin Bansal and Binny Bansal (unrelated) until September 2012. The Bansals and two of their relatives were also board members at WS Retail.

In September 2012, Flipkart was forced to sell a large stake in WS Retail to former OnMobile Global chief operating officer Rajeev Kuchhal, just weeks before the ED launched an investigation into the company’s business relationship with WS Retail. Both the Bansals and their relatives gave up their board seats, too.

WS Retail still accounts for more than 75% of Flipkart’s business, according to three other people familiar with the matter.

WS Retail and Flipkart share offices and at least one warehouse location in Bangalore, though both companies have different spaces in the warehouse, one of the people cited above said.

Tapas Rudrapatna and Sujeet Kumar, known to be close to the Bansals, control 46% of WS Retail, documents with the RoC show. Rudrapatna and Kumar were employed by Flipkart at least until September 2012. Their email addresses are still those of Flipkart, though Sujeet Kumar is listed as a permanent employee of WS Retail in documents with the RoC.

In April 2013, WS Retail decided that it would give a bonus of up to 4.5 crore to Kumar in case the company’s turnover for the year ended March 2014 exceeds 2,500 crore, the documents show. WS Retail generated revenues of 1,345.6 crore in the year ended March 2013; it still has to report results for the previous year.

The ED may serve a show-cause notice to Flipkart for a potential penalty of 1,000 crore, ET Now television channel reported in August.

“We do not share proprietary or business related details of any of our sellers. We are compliant with the laws of the land and are cooperating with the authorities," a Flipkart spokesperson said.

Flipkart has raised nearly $1.8 billion so far from investors, including $1.2 billion this year, while Amazon.com Inc. CEO Jeff Bezos said in July that the company would pump in $2 billion in India over the next few years.

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