Does eBay have a sweetheart deal with Snapdeal?

Bengaluru/New Delhi: eBay Inc. may have retained the right to buy a controlling stake in Snapdeal, and the US-based online marketplace would appear to have stronger shareholder rights in relation to fellow investor SoftBank Group, which invested $627 million in Snapdeal in October, according to regulatory filings reviewed by Mint and analysed with the assistance of lawyers and chartered accountants.

Snapdeal insisted the “information is incorrect” but would not explain or provide further details.

According to the filings, eBay has retained the right—with some time-bound riders—to undertake a so-called control transfer in Snapdeal; this means eBay can negotiate with other investors apart from SoftBank of Japan to buy a majority stake in Snapdeal. Additionally, SoftBank and its affiliates cannot own more than 49% of the share capital of Jasper Infotech Pvt. Ltd, Snapdeal’s holding company, for the next three years without eBay’s approval.

These details are disclosed in Jasper Infotech’s Articles of Association, a wide-ranging regulatory document that covers, among other things, the rights and obligations of a company’s shareholders. Mint obtained the document dated 16 January, which is in the public domain, from the Registrar of Companies (RoC).

eBay is formally referred to as the lone “strategic investor” in Jasper Infotech. SoftBank is one of the three “major investors” along with Nexus Venture Partners and Indo-US Venture Partners (which includes Kalaari Capital and New Enterprise Associates, or NEA).

Snapdeal formally closed its Series G round of funding led by SoftBank on 13 November, according to documents available with the RoC. The terms of eBay’s rights in relation to SoftBank are applicable from that date.

Jasper Infotech’s articles of association show that if SoftBank wants to sell its shares in Snapdeal over the next five years, eBay has the first right to buy them.

Experts said that the shareholder rights secured by eBay seemed to be unusually strong, especially as the company owns less than an estimated 10% in Snapdeal. SoftBank is by far the largest investor in Snapdeal with an estimated stake of 36-38%.

The filings say that eBay and Snapdeal have entered into an “eBay Letter Agreement” that shall “govern over” the article of association, in the event of any conflict. The agreement has been kept confidential, although its main provisions have been summarized in the filings. The summary does not refer to any dilution in eBay’s rights.

In April 2013, eBay led a $50 million fund infusion into Snapdeal. In February 2014, it led a $133.7 million round along with other investors such as Kalaari Capital and Bessemer Venture Partners.

The companies have not disclosed the exact amount invested by each of them.

In 2013, when eBay invested in Snapdeal, the latter was desperate for funds so eBay was able to secure stronger-than-usual shareholder rights, two people familiar with the matter said. eBay’s presence also encouraged subsequent investors such as BlackRock Inc. and Temasek Holdings Pte. Ltd to put money into Snapdeal, which helped eBay keep its rights even after SoftBank’s entry, the people said.

“Typically, later stage investors get the same or similar rights as early stage investors,” said Rahul Matthan, partner at law firm Trilegal. “Later stage investors put in more money than early investors and to that extent they carry more risk, so obviously they need adequate protections. Shareholder rights are crucial, especially at the time of an exit. It gives them leverage when they need it so investors put in a lot of effort to secure strong rights.”

While SoftBank did not reply to queries seeking comment, eBay declined to comment.

eBay’s formal title as strategic investor in Snapdeal may also indicate that the company wants to hold the option of buying out Snapdeal.

And eBay did try and acquire Snapdeal—not once, but twice over the past two years, Mint reported on 29 October. eBay came close to buying a majority stake in Snapdeal twice, at valuations of less than $500 million and less than $1 billion, respectively. But on both occasions eBay’s bids fell slightly short of Snapdeal’s asking price and it declined to increase the price, Mint reported then.

The strong shareholder rights of eBay may also potentially complicate the entry of another strategic investor in Snapdeal, another lawyer said. The lawyer, who spoke on the condition of anonymity as he isn’t allowed to speak on this subject, said that an acquisition of Snapdeal is eBay’s best bet of building a large business in India as the company’s independent local unit has failed so far to match the scale and rapid growth of Flipkart, Amazon and Snapdeal.

Snapdeal, which raised about $1 billion last year, is in talks with several new investors to raise its next round of funds.

China’s Alibaba Group has cancelled plans to invest in Snapdeal for now, after holding initial talks with the Indian company, technology news portal Recode reported on Wednesday.

Alibaba is referred to as one of Snapdeal’s competitors in the latter’s articles of association.

eBay is currently the only international e-commerce company that has invested directly in an Indian rival. eBay’s rival Amazon launched its Indian marketplace business in June 2013 while Alibaba recently invested indirectly in mobile recharge platform Paytm through its Alipay unit.

India’s largest e-commerce platform, Flipkart, and other local Internet companies are all backed by institutional investors and venture capital firms.

“It’s going to be very difficult for Snapdeal to get another strategic (investor). eBay has unusually strong rights and it will have to be willing to dilute them in a big way to make way for another strategic (investor),” the lawyer cited above said.